These over–the–counter options will be offered through an auction process and will be cleared by the Exchange. The first oil inventory auction is scheduled for October 27th, ahead of the release of the crude oil inventory number by the Energy Information Administration of the Department of Energy (DOE).
The introduction of oil inventory auctions represents an expansion of the commodities statistics market that was launched in June with the highly successful gas storage auctions.
These auctions build on the third successful implementation of a patented risk–mutualization framework developed by Longitude, Inc. Previously this method has been successfully used in auctions on economic derivatives, launched by Goldman, Sachs & Co. and Deutsche Bank in October of 2002, and mortgage prepayment derivatives launched in June of last year by Goldman Sachs, both developed in partnership with ICAP.
The options will help market participants manage exposure to the impact of reported US crude oil inventories released by the DOE each week. The strike units of the options will be the week's change in the level of inventories expressed in millions of barrels of oil.
The options will be traded through an auction format in which the options' prices are based solely on the relative demand of participants – the more popular the strike, the greater its value. To accommodate market interest from both Europe and North America, the oil inventory auction will be held the morning of the release of crude oil inventories (generally at 8:30 AM New York time/1:30PM London time each Wednesday). The change in the inventories determines which options are in–the–money and which are out–of–the–money.
"We are very enthusiastic about this opportunity to further expand the risk management tools offered by the Exchange and to build upon the promising start of our gas inventory derivatives," said James E. Newsome, Exchange president.
The auctions will be marketed to the world's leading energy market participants including a broad range of oil companies, institutional investors and other risk intermediaries.
The market is next set to expand around the end of the year when the Exchange intends to launch long–dated option contracts on end–of–season gas storage releases.
"While the initial reception to the gas auctions has been very good, customers have made it clear that adding the oil inventories will increase the flow in the gas auctions and also open these instruments for global participation," added Dennis Crum, CEO of ICAP Energy L.L.C.
Richard Ruzika, Head of Commodities at Goldman Sachs, added that "this exciting new product represents an important geographic expansion of a unique hedging vehicle as we expect the European oil market to be substantial participants. This number is a key factor in price discovery in all petroleum products globally."
The New York Mercantile Exchange is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals. The Exchange introduced energy futures 26 years ago as the first successful price discovery and risk management tool for this vital marketplace.
ICAP is the world's largest interdealer broker with a daily average transaction volume in excess of $700 billion, 50% of which is electronic. The Group is active in the wholesale market for OTC derivatives, fixed income securities, money market products, foreign exchange, energy, credit and equity derivatives. ICAP is one of the UK???s 130 largest quoted companies. It is listed on the London Stock Exchange and is a FTSE 250 company with a market capitalization of circa ??1.4bn (US$2.6bn). For more information go to www.icap.com.
Goldman Sachs (NYSE: GS) is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net worth individuals. Founded in 1869, it is one of the oldest and largest investment banking firms. The firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.
Longitude, Inc. provides a patented, enabling technology that allows financial intermediaries to create innovative derivatives' products for their customers without assuming market risk. Longitude's clients are investment banks and financial institutions that make markets or facilitate transactions in the capital markets. Founded in 1999, Longitude is privately held and located in New Jersey. For more information, please go to www.longitude.com.
