The Montreal Stock Exchange is forming a "strategic alliance" with New York Mercantile Exchange Inc. to create a new Calgary-based Canadian clearing house for crude oil, natural gas and electricity trades.
"We have a very simple goal and that's to bring Canada's presence in the energy trading business in line with its established presence in energy production," Luc Bertrand, president and CEO of the Montreal Exchange, said in a conference call.
The new Canadian company, as yet unnamed, will combine Nymex's knowledge of commodity trading and clearing with the Montreal exchange's expertise developing the Canadian financial derivatives market.
Nymex will purchase a 10-per-cent interest in the Montreal Exchange in a private placement at C$88 per share. Nymex chairman Richard Schaeffer will become a member of its board of directors.
Nymex's shares will be offered before the Montreal Exchange splits its shares three to one. With more than nine million shares at the Montreal Exchange, the transaction is estimated to have a pricetag of about $80 million, valuing the entire Quebec-based exchange at between $850-$900 million.
"Canada is a major centre on global energy markets," Schaeffer said from New York. "This will allow us to fill in the gap that exists in risk management for substantial global marketplaces, of which Canada surely is one of the few leaders."
The new company has a two-phase business plan.
First, it intends to offer clearing services to participants in over-the-counter energy markets. It then intends to develop and market exchange-traded futures and options contracts on the same commodities.
The new entity is expected to be open for business in March or April.
Bertrand and Schaeffer declined to answer many questions about the financial details of the deal, saying a prospectus is being finalized that will be sent to the regulator.
For competitive reasons, they wouldn't list the projected revenues or name the products that might be available.
But they said the services provided by the two partners will produce economies of scale and lower operational costs.
"The costs will be minimal, the profits will be swift," Schaeffer said, noting the relationship will expand to metals and soft commodities.
Bertrand said the clearing house will offer risk-management opportunities to the many smaller companies that are springing up in the thriving oilpatch.
"The time is ideal for the launch of this kind of service in the ongoing development of Canada as an energy centre."
The transaction raises competitive issues for Canada's biggest stock exchange, the TSX Group Inc. (TSX:X), which owns and operates its own energy exchange in Calgary, the NGX.
But it also clouds the future of the TSX's own strategy to expand in the increasingly lucrative derivatives business, which has helped propel the Montreal exchange's earnings and revenues in recent years.
When Canada's financial markets restructured several years ago, the TSX focused on senior company listings, while the junior TSX Venture Exchange handled smaller companies, mainly in resources.
