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NYMEX Board Approves IT Revamp, Creates Fully Electronic Energy Market

The NYMEX has approved a strategy to overhaul its information technology division and is drawing closer to implementing a plan to demutualize.

The New York Mercantile Exchange (NYMEX) has approved a strategy to overhaul its information technology division and is drawing closer to implementing a plan to demutualize. Simultaneously, the NYMEX is spinning off its electricity unit into an all-electronic, wholly-owned subsidiary. Meanwhile, the International Petroleum Exchange (IPE)-the London-based energy market that has been in acquisition talks with the NYMEX for the past several months-is on the verge of making a for-profit conversion of its own.

Harley Lippman-a public director at the NYMEX and CEO of software development and technology consulting firm Genesis 10-says the exchange's board agreed to "shake-up" NYMEX's technology department after seeing the results of an IT study performed by a consultant. "We did an IT evaluation of the NYMEX ... and there is a need for major changes and improvements," says Lippman.

Lippman declines to specify which systems will be overhauled and refuses to say whether there will be any major IT staff changes. That said, while the IT upgrade is a key issue, it is far from the only important item on the board's agenda.

A source familiar with the NYMEX says the exchange's board has "conceptually approved" a migration to a for-profit model. The source says the board has already received a preliminary report on the benefits of demutualization from Salomon Smith Barney (SSB), and expects to officially vote on a for-profit conversion no later than next March.

The SSB report states that the NYMEX should move quickly to demutualize, and recommends that the exchange should initially convert its members seats into shares-rather than issue an initial public offering. Not surprisingly, the report reads similarly to the for-profit proposal SSB concocted for the Chicago Mercantile Exchange (CME).

The CME's board recently unanimously approved that proposal (ETW, 11/8/99), which stated that demutalization would enable CME members to fully realize the equity value of their seats while giving the Merc the "currency and flexibility" to pursue strategic alliances and acquisitions.

Reading from the study SSB crafted for the NYMEX, the source says that, among other things, SSB concluded that demutualization would "unlock the equity value of the exchange and provide members with greater financial flexibility; provide NYMEX with an acquisition currency ...."

Noting that NYMEX seatholders share "similar concerns" to CME members, the source says that-like the Merc-the NYMEX plans to incorporate some open outcry protections in its for-profit proposal. However, the source says that regardless of whatever open outcry promises the exchange makes, a NYMEX shift to an all-electronic environment is inevitable. "They see the writing on the wall," the source says.

For electricity futures and options contracts, at least, the NYMEX has already concluded that screen-based trading is the only way to go. Last week, the exchange announced its intention to list all of its electricity contracts, full-time, on its Access electronic trading platform. As part of that decision, the exchange said it would create a wholly-owned, for-profit subsidiary dedicated exclusively to electricity trading.

The source says that after the NYMEX creates the subsidiary, it will issue an IPO for the entity. From time to time, the source says, the NYMEX and IPE have talked about forming a single entity that would trade their full complement of electricity products.

Prior to selling off a piece of its exchange to any outside investor, the IPE will demutualize, the source says. After the IPE converts to for-profit, NYMEX will then make a bid to acquire roughly 30% of the IPE, says the source.

At various points over the last six months the NYMEX has said it was interested in acquiring anywhere from 40% to 70% of the IPE. But the source says the exchange changed its tune after finding out that there are British tax laws that make it very onerous for a foreign company to acquire more than 30% of a market domiciled in England. "If they're going to acquire more than 30%, they'd have to make a play for the whole thing," says the source.

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