Nasdaq Expands in Germany Amid Energy Derivatives OverhaulRachel Morison
The biggest-ever overhaul of European energy derivatives rules is poised to pit Nasdaq OMX Group Inc. against the European Energy Exchange AG in Germany as the share of power handled by bourses increases.
European Union rules taking effect today require utilities and banks to direct some over-the-counter derivatives they buy and sell to a central clearing house that guarantees trades. Nasdaq OMX’s Oslo-based commodities unit wants a bigger share of clearing in Europe’s largest electricity market and will extend its range of monthly, quarterly and yearly contracts while adding German options on March 25, it said this week.
The changes follow the introduction last October of tougher rules for energy traders in the U.S., where regulators are leading efforts to increase oversight of OTC derivatives markets that were blamed for exacerbating the 2008 financial crisis triggered by the collapse of Lehman Brothers Holdings Inc. In Europe, companies will be required to report deals to a central repository to give watchdogs more insight into the 900 billion-euro ($1.2 trillion) OTC power and gas markets.
“There will be something to fight for,” Geir Reigstad, a special adviser for strategic initiatives in Europe at Nasdaq OMX Commodities, said in an interview in Essen, Germany. “There is something in the German market that exchanges haven’t managed to solve yet. There should be much more cleared volume.”
Clearing will become mandatory as part of the European Market and Infrastructure Regulation, or EMIR. The rules will be phased in over three years to reduce risk. Energy companies with derivatives positions with a value of more than 3 billion euros will need to clear their trades, according to the European Securities and Markets Authority. That limit excludes hedging transactions, where physical power and gas are sold in advance.
“EMIR is the biggest change to derivatives regulation for the energy markets since they were liberalized,” said Aviv Handler, a partner responsible for energy and commodities in Europe at SunGard Global Services SA in London. He has more than 18 years of experience in energy trading.
As little as 18 percent of the power traded in Europe’s biggest market is cleared, according to Bloomberg calculations based on statistics from London’s Energy Brokers’ Association and EEX.
As much as 64 percent of trading in Europe’s power, gas, coal and carbon emissions via brokers wasn’t cleared last year, according to data from London-based Trayport Ltd, which pools bids and offers from brokers and exchanges onto one screen.
“We would be happy to have more exchanges so there is competition in the market,” Stefan Dohler, head of asset optimization and trading at Vattenfall AB, Germany’s third-largest power producer, said in an interview in Essen. “At the same time, there is the danger liquidity becomes too fragmented.”
Even after 13 years of German futures trading on the incumbent EEX, buying and selling haven’t gained enough traction to challenge brokers to overtake them in the way Atlanta, Georgia-based IntercontinentalExchange Inc.’s ICE Futures Europe has become the dominant market operator for European Union emission permits. ICE handled 67 percent of the market last year, according to Bloomberg calculations based on data from Leba and ICE. Brokers including ICAP Plc, GFI Group Inc. and Tullett Prebon Plc still dominate trade in the region’s power and gas markets with 72 percent of the market in 2011, according to Prospex Research Ltd.
Griffin Markets Ltd. planned to start an OTC trading platform for energy in mid-March, the London-based brokerage said on Jan. 23. Nick Jackson, general counsel at Griffin, wasn’t immediately available for comment today.
Exchanges such as EEX, based in Leipzig, and Nasdaq OMX have their own clearing businesses which, for a fee, guarantee payment and delivery of a commodity in the event of default of a trading partner. At stake is a slice of Germany’s OTC power contracts worth 260 billion euros currently handled by brokers, according to Bloomberg calculations based on Leba volume and broker prices.
Nasdaq OMX first entered the German power derivatives market in 2007 without success. The exchange cleared 20 terawatt-hours of German power contracts last year, equivalent to the output from Germany’s biggest nuclear plant for more than 1 1/2 years. That compares with 1,172 terawatt-hours cleared by EEX and EPEX Spot SE in 2012, according to the companies’ annual reports.
The Nordic region, Nasdaq OMX’s home market and where almost all power transactions are cleared, offers less room for growth than Germany, Reigstad said last month. He was the head of the commodities unit until Feb. 8.
Four companies have signed up as “liquidity providers,” committing to trade an agreed amount of German power, Sara Aadnesen, a Nasdaq OMX spokeswoman, said by phone yesterday, declining to identify them.
Traders can reduce the costs of clearing through cross-commodity margining, or netting, which requires less cash to be posted upfront by companies because they combine offsetting positions on the same exchange. Nasdaq OMX is hoping to entice companies like Vattenfall that already trade Nordic power to move their German power volume to the bourse, Reigstad said.
“Trading and clearing on the same exchange for the Nordic, Germany and other European markets reduces the margin companies need to post as collateral and this is attractive,” Dohler said.
EON SE and RWE AG, Germany’s two biggest utilities, are trading German and Nordic power on Nasdaq OMX, according to its website.
ICE Futures Europe, the world’s second-biggest energy futures exchange, may also start to offer German power contracts, according to Dohler and Reigstad. If ICE moves into the German market, the question will be whether there is enough volume to spread across three exchanges, Dohler said.
ICE, which handles trading in the global Brent crude oil benchmark, “is strong in hydrocarbons but weak on power,” Reigstad said. “They must have a game plan.”
The company continuously evaluates new opportunities, Claire Miller, a London-based spokeswoman for ICE, said by e-mail. “ICE cannot comment on future product strategy,” she said.
Peter Reitz, EEX’s chief executive officer, isn’t worried about competition from other exchanges.
“So far, they have not had very much success in this area and this is not something that is causing us sleepless nights,” he said in an interview in Essen. “It is surely something that we keep a close eye on, as we always do with the international competition.”