Of the realizations being forced upon the energy markets, one in particular must be recognized if the markets are to return to a viable state - that efficient markets require strong structures and, up until now, the energy trading market has lacked such a structure. In rebuilding the energy trading marketplace, it is important to have a clear blueprint to follow so past mistakes are not repeated. The optimal blueprint must concentrate on bringing efficiencies to the market that will allow sustainable growth and lower internal operating costs.

Today's over-the -counter ("OTC") energy markets lack an effective and efficient overall structure. Regulators are groping for a set of market governing rules, risk managers are without standardized risk measurement tools, data collection and price point indexing is in total disarray. The marketplace has yet to embrace technological advancements necessary to address these issues as well as reduce internal operating costs. With the breakdown of bilateral credit extension, OTC trading has discovered the necessity for a centralized clearing structure.

While OTC trading of power and gas has been around for some time, the marketplace has yet to establish efficient collateral posting mechanisms and an efficient trade clearing mechanism similar to those found in most financial or commodity markets. The New York Mercantile Exchange ("NYMEX") is attempting to adapt its clearinghouse/FCM clearing structure to meet the needs of OTC energy traders. Virtual Markets Assurance Corp. ("VMAC") will soon launch an innovative "credit wrap" solution that will enhance trading liquidity by offering credit enhancement to OTC trades. Amongst the key differences between the two competing products the VMAC proposal, when tied into an electronic platform capably of fully supporting it, VMAC operates within a truly efficient environment where all prices are pre-screened to assure traders that they have credit available to any counterparty and for any bid or offer shown to them. In addition to pre-screening trades, such a structure provides for the operational benefits and cost reductions of straight through processing. This is but one example of the advancements working their way into the new structure of the marketplace.

IT Needed

OTC markets must draw nearer to a strong, viable and truly efficient structure. Participants need to embrace available technology that will link trade execution platforms with clearing solution providers as well as risk management systems. An integrated stream of trade data sent real time to both market participants and an entity capable of providing market oversight would reward participants with enhancements in portfolio and risk management techniques, reductions in internal operating costs and with assurances of overall fairness and market integrity. When the current commodity cycle in which energy trading is currently mired finally turns back up, trading volumes will inevitably exceed historic norms and eventually historic records. A viable and truly efficient market structure must therefore be scalable to accommodate greater volumes and extendable to accommodate enhancements in technologies and trading techniques.

Technology exists today that can bring a viable stable structure to energy trading. In the near future, IT budgets will allow for a general upgrading of internal systems used by energy traders. Until budgets are made available for upgrading physical infrastructure, the market needs to upgrade structural design. A major obstacle to market efficiency is a lack of incompatibility between trade processing systems of traders, brokers and clearing solution providers. Technical standards need to be developed today so tomorrow's marketplace allows participants to interact with each other in a real time environment.