Outsourcing Rocks Nymex, DIFX

LONDON—Over the last four months, Nymex opened a new floor in London as the Dubai International Financial Exchange (DIFX) launched in the Middle East. Although the projects differ in nearly every way, both exchanges share a willingness to outsource key elements of their technology.

However, the outsourcing deals didn't all go as planned.

According to Stuart Turner, the head of market operations at the DIFX, the original business model for the DIFX was developed in early 2004 after the chairman was appointed in mid-2003. By the end of March 2004, a deal was made to outsource a number of core systems, and the London Clearing House (LCH) was slated to do the clearing and settlement for the firm.

However, following the completion of the merger between LCH and Clearnet in 2004, LCH officials had to reassess their work priorities, says an LCH.Clearnet official. With its resources being allocated to the integration processes common to any merger, "we didn't have the capacity to deal with it," says the official. LCH.Clearnet withdrew from the deal in early September 2004.

Following the upset in its plans, DIFX reevaluated its business model, and decided to clear and settle trades internally, and to establish its own central securities depository (CSD), agreeing deals with vendors for systems in January of this year. The exchange is using Standard Chartered as its clearing bank.

Perhaps the most important of the DIFX's outsourced elements is its trading system. NSC is the e-trading system of Paris-based vendor AtosEuronext, and as a result all trades are matched in AtosEuronext's data centers in Paris. NSC has an open API (application programming interface), but for its members' benefit, DIFX signed a deal for users to be able to use French vendor GL Trade's broker network, GL Net, to access NSC. "New members have the choice of using the GL interface," says Turner. Firms using GL Net can access NSC using the connectivity platform Bourse Connect, says Turner, while others—such as local firms in Dubai—might have a leased line with Bourse Connect direct to the trading platform.

GL Trade officials acknowledge that they are working with DIFX, and that a new business unit, dubbed GL Trade Middle East North Africa (MENA), will cover Dubai (DWT, Dec. 5). The MENA group will be based in Tunis.

In a prepared statement, GL Trade officials say that they are offering access through service bureau connectivity via the Internet or the vendor's GL Net order routing network. GL Trade can also host trading and market data feed equipment, hardware and software. The vendor is also offering direct market access (DMA) services to DIFX, and access through GL Trade's trading station offerings.

In addition, the DIFX is providing its own clearing and settlement services, and is using eClearSettle, a solution from Indian vendor Tata Consultancy Services. The system lets the DIFX act as a CSD. While Tata will run the eClearSettle system for six months, Turner says he expects the trading system to be outsourced for "a few years." The DIFX has about 60 staff in all, with a small IT division, Turner says, with most of the growth in the last few months. Tata officials did not respond to inquiries for further comment by press time.

The outsourcing deals have resulted in trades being matched in Paris and completed trades being sent to Dubai. "All the post-trade processing takes place in Dubai," Turner says. Business continuity issues have been dealt with comprehensively: Two separate connections to Paris provide a backup for any connectivity failure, and two separate communications rooms in Dubai keep the clearing and settlement processes in action. The eClearSettle software is clustered across the two communications rooms.

But just as connecting a computer to a network is different from establishing the network itself, Nymex's London floor took a different approach to its technologies. Nymex Europe's clearing and trading operations are hosted in its headquarters in New York, so there was no need—as for the DIFX—to outsource such functions. This was seen when Nymex launched its trading floor in Dublin last November.

Like the Dublin floor, Nymex's floor in London is an outpost of its big brother in New York, connected to the Big Apple floor via dual 100 megabit lines, says Sam Gaer, the CEO of Nymex Europe (DWT, Aug. 29). Much like its Dublin floor—Nymex moved out of its Dublin facility the Friday before its launch in London—the London floor is "like another pit in New York, just a bit more than an elevator ride away," as Gaer said of the Dublin floor a year ago. Connected to its New York center, the London floor is a virtual extension of its transatlantic parent, with central processes like clearing taking place in New York.

However, the IT infrastructure services supporting the Nymex London floor are outsourced to Nordic vendor OMX Technology. The five-year deal follows Nymex's decision to move into a floor below OMX's office on Finsbury Pavement. The deal means that OMX will host Nymex's European IT infrastructure, as well as provide desktop and network support for its trading floor.

According to Gaer, Nymex chose to outsource its IT infrastructure to OMX to hasten the exchange's opening. But for Turner at the DIFX, costs are an issue.

While Nymex has been getting input from floor traders on the design of the floor and its technology, the DIFX has looked to its own members for advice. A group consisting of the exchange's four initial members—Deutsche Bank, HSBC, UBS and CSFB (Europe)—was formed. First the group was informal, says Turner, but now it is a formalized member group, chaired by Deutsche Bank. The group has advised the exchange on issues ranging from its market model to sales management. "We're all in this together," says Turner.