Tighter U.S. commodities regulations could hurt American derivatives exchanges as market participants would likely head for budding rivals on foreign shores, analysts said.
Like any other businesses, exchanges and markets are competitive. With electronic trading, they are competitive around the globe, so participants will look for the most efficient and least expensive place to trade, said David Resler, chief economist at Nomura Securities International Inc. in New York.
Two Dubai energy markets are about to launch futures listings that will compete against flagship energy contracts traded in New York and London. The Dubai debuts coincide with a flurry of activity on Capitol Hill to pass legislation that would curb what some lawmakers perceive as speculative forces possibly a factor pushing the barrel of crude to a new all-time high of $135.09 on May 22.The Dubai Gold & Commodities Exchange just launched cash-settled contracts on the worlds two crude oil benchmarks, West Texas Intermediate Light Sweet Crude the flagship contract of the New York Mercantile Exchange and Brent Crude Oil. Nymex trades the WTI for both physical delivery and financial settlement while its Brent contract is cash-settled. For its first day of trading, the DGCX traded 2,833 contracts, or less than 1% of the 326,598 WTI contracts for July delivery traded on Nymex on May 27.
On June 2, the Dubai Mercantile Exchange will launch its own financially-settled Brent contract, which is traded on over-the-counter and regulated markets owned by IntercontinentalExchange Inc., Atlanta, for either physical delivery or financial settlement. The DME is also expected to launch a WTI contract later this year.
The DGCX was founded in 2005 by government-owned Dubai Multi Commodities Centre in partnership with Financial Technologies (India) Ltd. and the Multi Commodity Exchange Ltd, both in Mumbai. NYSE Euronext took a 5% stake in MCX in February.
The DME, which made its debut last year with Oman crude futures contracts, is a joint venture between Tatweer, part of government-owned Dubai Holding, the New York Mercantile Exchange and private equity group Oman Investment Fund, Muscat.On May 7, Democratic senators presented the proposed Consumer-First Energy Act of 2008, which includes provisions similar to the Houses Renewable Energy and Energy Conservation Tax Act of 2008, which was passed 236-182 on Feb. 27.
The Senate bill would prevent U.S.-based oil traders from routing transactions through offshore markets to evade position limits. It would also require the Commodities Futures Trading Commission to substantially raise margins for oil trading.
There is a need for market oversight, but no country can decide to set onerous regulations and not expect that these regulations will likely drive business away, Mr. Resler also said, noting the negative impact that the 2002 Sarbanes-Oxley Act had on U.S. capital markets. One unintended effect of the Sarbanes-Oxley legislation was to push companies to go public or raise capital in foreign markets to avoid enhance scrutiny.