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Huw Jones
In derivatives, sweeping reforms provoked by the financial crisis have stimulated competition aiming to exploit the new regulatory requirements. Now there are signs that things are heating up in the same way in another part of the market – energy.
The power and energy sector in Europe has long been dominated by trading houses like Tullett Prebon and ICAP, with bilateral trades largely done off-exchange and uncleared, and the European Energy Exchange (EEX), part of Deutsche Börse’s Eurex.
"All of a sudden a big part of the commodity business is now in the spotlight due to upcoming regulation, but there are still a lot of uncertainties because there are not enough details yet on the new rules," said EEX Chief Operating Officer and board member Steffen Koehler.
Market shares may now be up for grabs while there is an underlying shift towards natural gas to meet energy demand, and the regulatory push for greater transparency and safety by clearing trades and executing them on a multilateral platform.
Regulators in the United States and the Netherlands have just given the green light for ICE Endex to trade power in continental Europe. This is a joint venture between Atlanta-based IntercontinentalExchange (ICE) and the Dutch gas infrastructure company Gasunie.
“We will bring our experience in the regulated North American and UK natural gas markets to establish and grow liquidity for natural gas hubs in continental Europe,” said David Peniket, president of ICE Futures Europe.
CME Group has begun clearing gas contracts at its European clearing house. ICE wants to clear its contracts on its own European clearing house. Both are targeting the highly liquid benchmark Dutch and UK hubs, which account for two thirds of European gas trading.
Added to this, Griffin Markets has launched a new OTC energy trading platform which is listing the same bilateral and off-exchange cleared contracts in European gas, power and coal that market participants currently trade through brokers. Griffin uses technology and distribution from ICE and makes it easier to clear such trades to meet increased demands from regulators for safety and transparency.
Not surprisingly, the incumbents are already looking at ways to fight back as the trading and clearing sector in energy hots up.
EEX will shift gas trading to Trayport later this year ahead of cooperating with French peer Powernext in trading gas. If regulators give the nod, they would trade natural gas on the same platform.
"It's fair to say we are very strong in power and from there we are now going to grow to other asset classes. Absolutely, we see a bigger role for us in natural gas because of our project with Powernext. We are pretty confident we will continue in that way in 2013 as we have received pretty good feedback from the market on this idea, which we plan to go live with soon" Koehler said.
"It's not a surprise that the players currently active in that market are trying to build up their portfolios to be perceived as a one-stop shop. It's hard to predict what the outcome will be. The customers will decide as they will compare service portfolio and associated cost," Koehler added.
The big question is whether there will be enough business to go round either on the trading side or on the clearing side in natural gas and other energy contracts. Other upstarts are expected by industry insiders and could end up with a re-run of what was seen in the equities sector: a rash of new ventures, with few making money, leading to inevitable consolidation.
“Whilst many factors such as connectivity, technology and cost will play a large part in the biodiversity of trading platforms; the real winners will, as ever, really be decided by where the market liquidity resides,” said Alex McDonald, chief executive of the London Energy Brokers Association.
As Koehler hints, the winners may not be those with the cheapest trading or clearing costs, but who can offer a wide range of products so that the customer can save on precious collateral through efficient margining regimes.
Operators who can bring the OTC and on-exchange world closer together would also help customers lower their costs.
The shake-up among equity trading upstarts in Europe took many years. But for the energy sector it could happen a lot faster. Clearing has become an expensive place to be, given the tough regulatory capital requirements that must be met to stay in business - again something which favours those with deep pockets.
