The world’s biggest derivatives exchange may offer gas trading at the U.K.’s National Balancing Point and the Title Transfer Facility in the Netherlands as early as next month, Martin Fraenkel, CME’s managing director for International Energy, said yesterday. The expansion means the Chicago-based bourse will rival other exchanges that feed prices into the Trayport Ltd. system it agreed to buy last week.
More than 50 percent of U.K. gas trades and as much as 91 percent of those in the Dutch market were in June handled by over-the-counter brokers, according to Trayport data. CME has offered clearing of U.K. and Dutch OTC gas trades since last year on its European clearing house.
“We know from our client base that there’s interest in clearing gas contracts in major hubs and the most actively traded at the moment are NBP and TTF,” Fraenkel said by phone. “There’s client interest in having other clearing venues for those hubs and that’s why we prioritized them.”
CME agreed to buy Trayport’s owner GFI Group Inc. for $580 million, pitting itself against Intercontinental Exchange Inc., which operates Europe’s biggest energy market. While the bourse’s new futures contracts will be fed onto the Trayport screen, the energy business will remain independent with London-based Elliott Piggott keeping his position as Trayport’s chief executive officer, Fraenkel said.
“You have in the value chain brokers that today are providing the quotes and giving liquidity to this platform,” Diego Perfumo, an exchanges analyst at Equity Research Desk in Greenwich, Connecticut, said on July 30 by phone, the day CME announced it had agreed to buy Trayport. “Instead of fighting the established participant they buy them.”
London-based Trayport, founded in 1993, aggregates bids and offers from exchanges and brokers to show the best prices on one screen. The platform, which offers trading in markets from power to coal, displays prices from brokers including ICAP Plc (IAP) and Marex Spectron Group Ltd. to bourses such as ICE Futures Europe, Nasdaq OMX Group Inc. and Powernext SA.
“Trayport does not prioritize one exchange or clearing house over another,” Fraenkel said. “That will continue to be the case once this deal is completed in the first quarter of 2015.”
The European Commission imposed a requirement in 2012 for all over-the-counter derivatives transactions to be guaranteed through a central clearing house under the European Market Infrastructure Regulation.
Member states may choose to exempt companies from the bloc’s May 15 amended directive on Markets in Financial Instruments in cases where the sole purpose is to hedge the commercial risk of clients in the gas and electricity markets.
CME Europe’s U.K. and Dutch gas futures will be physically settled, which means the commodity will be delivered at the expiration of a contract, Fraenkel said. ICE Futures Europe already offers physically-settled contracts in U.K. gas, while Dutch gas trading is done on the ICE Endex market. Dutch gas trading on ICE accounted for 15 percent of all the market in June, a record since Trayport started gathering the data.
“It’s between CME and ICE for most commodities these days,” Trevor Sikorski, head of gas, coal and carbon at London-based consultants Energy Aspects Ltd., said July 30 by phone.
CME also plans to expand into other European gas markets this year with financially settled futures, Fraenkel said, declining to provide further details.
The acquisition of Trayport will help CME boost European gas trading in the same way it did for its coal market, according to Fraenkel. Buying and selling of CME’s international coal contracts rose to a record last month to 193,804 contracts, the bourse said yesterday. That’s a 19 percent increase from June.
The possibility of processing the whole trade cycle from transaction to clearing on one platform was “critical” to the growth in CME’s coal trading, he said.
“There’s an opportunity to replicate that model and we will replicate it. That’s certainly what we are looking to with the launch of our gas contracts,” Fraenkel said.
CME may also offer power trading as part of its drive to expand in energy outside North America, he said. European Energy Exchange AG and Nasdaq OMX’s commodity unit both offer electricity trading in Europe, also competing with brokers from Tullett Prebon Plc and BGC Partners Inc.
“We certainly are looking at power markets but we aren’t ready to make an announcement yet,” Fraenkel said. “We see energy markets globalizing around the world, de-regulating as far as power and gas are concerned, and we see opportunities to grow with those markets as those trends play out.”
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