Dubai Mercantile Exchange Eyes US Regulation As Volume Builds

The Dubai Mercantile Exchange has asked U.S. regulators to ease a key trading rule that its chief executive said is hampering efforts to develop an oil-price benchmark.

The exchange has asked the U.S. Commodity Futures Trading Commission to relax margin-calculation rules for traders on its markets, cutting trading costs for its flagship Oman Sour Crude contract.

"This would put us on a level playing field and remove the barriers to trade," said DME Chief Executive Thomas Leaver, who hopes to secure clearance this month.

However, tighter limits on commodities trading under consideration at the CFTC could also affect the two-and-a-half-year-old DME, which clears customer trades in the U.S.

The DME's sour crude futures contract, launched in June 2007, is among a host of products aimed at establishing a pricing mechanism for the heavier crude oil produced in the Middle East.

Though it struggled to gain traction in its first 18 months, Leaver said the Oman contract picked up some momentum after credit markets dried up in the wake of the financial crisis last year, and banks and oil companies redirected over-the-counter business to regulated exchange platforms.

The DME reported Monday that trading volumes have grown 58% year to date, with a record daily average of 2,624 Oman contracts changing hands in October, topping a previous record set in June.

But a CFTC rule for new exchanges, requiring customer margin levels to be calculated on a two-day holding period, remains a drag on volume, according to Leaver.

The rule makes it about 30% more expensive for investors to trade Oman crude oil contracts, versus global benchmark contracts like West Texas Intermediate and Brent crude, he said.

The DME wants to rectify this, submitting a request Sept. 30 that would put the Oman contract on equal footing with competing contracts. Leaver said he hopes to get approval from the CFTC this month.

Conceived as a joint venture among the New York Mercantile Exchange, the United Arab Emirates' government development company Tatweer and the Oman Investment Fund, the DME has been cited as a potential beneficiary if tougher U.S. regulation forces energy trade overseas.

Washington regulators are weighing rules that would cap the level of trading done by so-called speculative commodity investors - participants that aren't hedging direct commercial exposure to commodities.

Such speculators have been blamed for the historic run-up in energy and agricultural commodity prices in 2008.

But Leaver said that his market would be affected alongside U.S. exchanges if the CFTC imposes tighter position limits on U.S. commodities trade, because the DME clears futures trades through Nymex parent CME Group Inc (CME).

"It's a double-edged sword for us," Leaver said. "We have the same large position reporting requirements as CME and Nymex."

As it watches Washington, the DME is preparing to introduce clearing for Oman crude swap products through CME's ClearPort platform in early 2010. The move, which requires regulatory approval, could bring more over-the-counter business to the DME.

Leaver said the exchange this month also looks to introduce intercommodity spread trading, linking Oman crude to WTI and Brent varieties.

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

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