Q&A on Energy Trading with Joe Raia

Managing Director, Energy and Metals Products, CME Group

September 17, 2009

In 2008, NYMEX became part of CME Group. Together, we offer the most extensive and liquid energy complex in the world, including Light Sweet Crude Oil (WTI), natural gas (Henry Hub), petroleum, and electricity products.

Q.What are the biggest challenges facing energy trading companies today and how will CME Group help them address these issues?

A. Uncertainty in the regulatory arena is our biggest challenge today, as far as what kind of regulatory changes will be made and when. These changes will definitely affect how we manage risk in the energy markets, and that applies not only to most U.S. companies but to anyone who has to manage risk.

CME Group will be helpful in how the energy companies address these issues because of our close regulatory relationship with the CFTC. We have a good opportunity to manage that relationship and also make sure we have the right products and risk management procedures to help our customers.

Q.What do you consider the most important advancement that CME Group has made in the past five years?

A. It's not really just one advancement but several that have worked together to bring us to a position of industry leadership. With the innovative introduction of CME ClearPort seven years ago we began offering clearing to the OTC energy markets, and we also had the additional foresight to bring in electronic trading. Those were important venues to add, and then when we went to side-by-side trading with the CME Globex electronic trading platform three years ago, that really started the ball rolling toward the globalization of our products. We now offer more than 700 products on CME ClearPort, and have launched 222 products so far this year as we continue to address the hedging needs of our customers.

Q.What services does CME Group offer that your competitors do not?

A. We offer an unparalleled range of products across asset classes, outside of energy, that includes precious and industrial metals and agricultural commodities, Our customers also enjoy the benefits of cross margining when they trade different products and that makes a big difference in terms of the overall cost of trading. In addition, we are continually introducing new products and we make sure we offer the products our customers need to manage risk. We listen to our customers carefully and that is why we offer products and services that our competitors do not. The combination of all our products, our global distribution and our industry-leading clearinghouse, make us the largest clearing source globally and give us the ability to manage risk on a daily basis that is second to none.

Q.Who is trading energy (electricity, natural gas, crude oil, and refined fuels) these days – utilities, oil companies, banks, brokers, or all of the above?

A. All of the above. We see with the globalization of our products and our niche products, like our Singapore products and European products, that our reach is 24-7 around the world. We have more than 10,000 global users on CME ClearPort. We are reaching end users who never thought of clearing products in the U. S. and now those companies are our direct customers in a unique marketplace, and are allowing us to address their risk management concerns.

Q.Have most energy trading firms made the transition from Excel spreadsheets to sophisticated ETRM systems? Should they?

A. Yes, they have – I myself tried using spreadsheets back in the mid 80s and it was painful. Absolutely they should switch over to ETRM systems. But most of the switching over actually happened with Enron in the late 90s. When it defaulted in 2001 it pushed the whole marketplace to trading risk management systems and straight through processing, which systems and exchanges should have.

Q.What are your leading products?

A. Many of our contracts are benchmarks that set the price for these resources worldwide, including Light Sweet Crude Oil (WTI), which is our highest volume product, followed by natural gas (Henry Hub). Our zonal 5MW electricity contracts are also performing well since they were introduced late in 2008.

Q.How do people access these markets?

A. There are three ways to access to our markets – electronically, through CME Globex, via a broker on the trading floor, and through CME ClearPort, which provides a range of OTC clearing services for transactions conducted off-exchange.