East meets East at Dubai Mercantile Exchange

DUBAI, July 16 (Xinhua) -- Despite its huge success in attracting oil futures trading, the Dubai Mercantile Exchange (DME) looks to East Asia for more, its chairman told Xinhua in an exclusive interview.

The DME is the only futures exchange by international standards in the Middle East. "In the world futures trading, you can't generate volumes if you try to take liquidity form other exchanges, " said Ahmed Sharaf, chairman of the DME, "Many other mercantile exchanges tried to do so. But they failed."

In contrast to those who tried and failed, the DME has been highly successful since its inception in 2007. It developed the DME Oman Crude Oil Futures Contract, which allows oil trading firms to hedge themselves against price fluctuations of Oman crude oil.

Since then, the 100-percent-electronically-run market has traded more than 3 million contracts on its flagship product, which is the equivalent of 3 billion barrels, the DME announced on April 4.

The vast majority of traders at the DME are based in the geographical region "East of Suez," Sharaf said, adding, that "our strategy has always been in generating gradual growth over time."

In April this year, the DME achieved a new monthly volume record when 123,162 contracts changed hands, representing a 9- percent increase over the previous month's record volume and 15 percent more than the record set in February 2012.

On Friday, the DME Oman Crude Oil Futures Contract for September 2012 settled 1.32 U.S. dollars higher than the day before at 98.59 dollars, around 10 bucks above the U.S. crude price and 4 U.S. dollars less than Brent.

The futures contracts are standardized financial products which allow traders to buy or sell a specific quantity of a commodity in the future. The prize of a futures contract is solely determined by supply and demand.

"We managed to establish the DME Oman Crude Oil Futures Contract as a globally-accepted benchmark for those buyers and traders of Oman crude, in particular to those based in East Asia," he added. One card the DME played was geography.

"Dubai is exactly located in between the Eastern and the Western time zones, thus our market helped to bridge the trading time-gap between futures markets in Hong Kong and Singapore on the one side and London and Chicago on the other side of the globe."

The Asian countries are highly dependent on "black gold" imports from the Gulf. South Korea imports 84 percent, Japan more than 90 percent of its oil needs from the Gulf Arab region. China imports 58 percent from the region, according to data compiled by the International Energy Agency. China National United Oil Corporation from Beijing is an active off-floor trading member at the DME.

The DME's flagship contract's concept is simple and unique. The Emirate of Dubai and the Sultanate of Oman base their oil sales solely on the DME Oman Crude Oil as a reference. Oman crude oil is a sort of oil containing a relatively high amount of sulfur. Because of this, Oman crude is also regarded as sour oil, in contrast to West Texas Intermediate (WTI) and Brent, which are called sweet sorts of oil.

"For buyers of Oman or Dubai crude it makes not much sense to look at WTI or Brent," Sharaf explained, "If there is a hurricane in the United States or any disruption in the Gulf of Mexico, does this affect crude oil exploration here in the Gulf? It does certainly not."

However, Sharaf confessed that it was challenging to establish the market at the start five years ago. "There is not culture for derivatives like options or futures in the Middle East. We had to get the know-how and the acceptance from our close environment."

As an integral part of the onshore-hub Dubai International Financial Center (DIFC), the official language at the DME is English and the U.S. dollar is the official currency. "Without the 2004-founded DIFC, the DME would not be here," Sharaf said.

Visitors of the DME are impressed by the DME's colorful, science-fiction-style chart screens, with the surface of a tennis court, and the quietness on the floor. As buying and selling is done via computers, a trading based on open outcry does not exist. Chairman Ahmad Sharaf overlooks a total of 28 staff.

"As our customer base in China is growing, we are in the process of hiring Chinese staff," Sharaf said, who earned a bachelor's degree and a master's of science in petroleum engineering from the Colorado School of Mines and an MBA from Duke University's Fuqua School of Business.

More eyebrow-rising, at least at a first glance, is the DME's ownership structure. The U.S. futures exchange CME Group owns through its New York Mercantile Exchange, known as NYMEX, half of the DME, while the Oman Investment Fund holds 29 percent. Nine percent are in the hands of the state-owned Dubai Holding, the rest is distributed among investment banks and energy trading firms.

If the DME's turf is East of Suez, than why the leading Western mercantile group owns half of it, one might ask. "The CME increased its stake form a quarter to 50 percent in February this year, because it aims to expand its franchising to the East. The CME lists a wide range of futures on almost all sorts of commodities, so its know-how helps us to develop the DME further," Sharaf said.

The DME Oman Crude Oil Futures trades executed on the DME are cleared through and guaranteed by the NYMEX.

After the DME's former CEO Thomas Leaver resigned on March 7 to pursue other interests, Sharaf became for an interim-period Acting CEO of the DME. And the Emirati is sure that his market is just at the beginning of a long journey to the East. "We do not set specific targets. As I said, we prefer gradual growth over a fast boom-bust scenario."

On June 21, Christopher Fix, was eventually appointed CEO. An American national, Fix is the former Head of Commodities for Asia- Pacific with French lender BNP Paribas.

Having worked for more than 20 years in the international commodity markets in New York, Paris and Singapore since the early 1990s, Fix speaks Mandarin fluently. He earned his Chinese language diploma from Beijing Teachers College.

The appointment of Fix, the DME's coup in the Year of the Dragon, reflects the DME's eagerness to attract Chinese oil- related companies. Clearly, the DME's objective to embrace the East succeeded. The debut is done.

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