DUBAI CME Group Inc (CME.O), the biggest U.S. futures exchange operator, doubled its stake in Dubai Mercantile Exchange (DME) betting on the bourse's prospects for establishing a new crude oil futures benchmark for the Middle East and Asia.
The CME and Oman Investment Fund, the Gulf state's sovereign wealth fund, both injected an undisclosed amount into a recapitalization of the DME, which trades the Oman oil futures contract.
CME's stake in DME will rise to 50 percent from 25 percent, while Oman Investment Fund's holding goes to 29 percent from 25 percent, the companies said on Tuesday.
The DME is pushing the Oman contract as a benchmark for markets east of Egypt's Suez canal, arguing that much of the world's crude comes from the region and should be priced in the Middle East. Its target is for the Oman contract to eventually challenge established global benchmarks, Brent and U.S. crude futures.
"We strongly believe the Omani crude contract is an outstanding proxy for the Middle Eastern crude. It make lot of sense. It has good correlations," Gary Morsches, managing director, energy for CME Group said in a conference call to reporters.
The DME is appealing to national oil companies in the Gulf to win their backing for the contract. Other market players have also called for a third benchmark.
Non-OPEC oil producer Oman uses the DME contract to set its crude price.
CME operates the Chicago Mercantile Exchange, the 164-year old Chicago Board of Trade and the New York Mercantile Exchange.
"The CME taking a bigger stake basically means they'll start getting serious about market making. The CME wanted to get serious about this contract, but financially there wasn't much in it for them," a Dubai-based trader speaking on condition of anonymity said.
The deal dilutes positions in DME held by top banks, oil traders and the ruler of Dubai's investment vehicle, Dubai Holding DUBAHC.UL.
The holding company, which is undergoing debt restructuring at key units, will not be participating in the recapitalization program. Its 25 percent stake was reduced to 9 percent as a result.
"The fresh funds came from CME and OIF. The other strategic investors were diluted as part of the infusion," DME Chief Executive Thomas Leaver told reporters on Tuesday.
"Dubai Holding was diluted ... it wasn't a buyout but just a dilution of shares," he said.
The CME, Omani fund and Dubai Holding set up the DME in 2007 as a joint venture along with oil and financial firms like Shell (RDSa.L), Vitol VITOLV.UL, Goldman Sachs (GS.N) and JPMorgan (JPM.N).
The latter group will now hold a combined 12 percent stake after the recapitalization.
In 2011, the DME delivered more than 145 million barrels of crude oil, a year-on-year trading volume growth of 19 percent, according to the statement.
Average daily volumes rose to 3,505 contracts, while physical delivery of the DME Oman contract also grew through 2011, with an average of 12.115 million barrels of crude oil delivered each month, the statement said.
(Additional reporting by Humeyra Pamuk; Editing by Amran Abocar and Erica Billingham)