Away from all the attention garnered by changes to interest rate derivatives trading, US exchanges also have designs on reshaping another market: European power.
UK and Dutch regulators this week passed the joint venture between IntercontinentalExchange and Gasunie, a European gas infrastructure company, to create an exchange to trade European natural gas and other power cash and derivatives markets.
The deal, first announced last September, will create the US group’s first exchange in continental Europe, known as ICE Endex. It already makes markets in the UK.
To little fanfare, they were joined this year by CME Group, the world’s largest futures operator, which started clearing two of the largest gas contracts at its European clearing house.
Given their reliance on energy markets trading domestically, it is perhaps no surprise that they would eventually turn to Europe. Energy, and the electricity market, is, after all, where Jeff Sprecher, chief executive of ICE, started his life as an exchange boss. Previously he had been a power plant engineer. It was the growth and failure of Enron that transformed ICE’s fortunes – and not only because Mr Sprecher realised the failed energy trader had been trying to take ICE’s idea.
Certainly, benchmarks for natural gas in the region have yet to develop the deep liquidity seen on the Henry Hub benchmark in the US. Some, like Citi analysts today, also argue the US is undergoing a deep fundamental shift away from oil to gas. If it genuinely happens (highly debatable), and Europe follows suit, the US exchanges want to be there at the start.
“I think natural gas in Europe is relatively immature and benchmarks in UK and Amsterdam will become important from a long-term strategic standpoint,” he told delegates at the FIA Boca conference earlier this month. He wants to build a benchmark that more accurately reflects the fundamentals of the market.
But in the short term, the opportunity for both CME and ICE, like elsewhere, is to exploit the savings customers can make from netting the margin they have to put up to trade derivatives from the new global rules. Like its counterpart Dodd-Frank, the European Market Infrastructure Regulation is pushing to move more of the OTC market on to electronic trading venues.
In addition, the tighter capital requirements imposed on banks by Basel III requirements may make it harder for them to provide the industry with the credit and swaps trades they have done in the past.
As it stands, around three quarters of Europe’s gas and power derivative trading is uncleared. That will have to change. The two contracts that CME and ICE have targeted – based on the Dutch Title Transfer Facility (TTF) hub and the UK’s National Balancing Point (NBP) hub – account for over two-thirds of all European gas trading.
Until CME Clearing Europe stepped in, there was no relevant clearing option available to the market to clear physically-settled forward contracts. The netting effect also explains ICE’s enthusiasm to move ICE Endex derivatives from clearing at the European Clearing House, owned by Deutsche Börse’s EEX, to its own London operations. That move is subject to regulatory approval.
ICE Endex gives ICE the derivatives trading to sit on top of their operations. The CME hasn’t said if it will trade gas derivatives in Europe but it wants to make its forthcoming London derivatives exchange a copy of its US business. It doesn’t require a huge leap of imagination to think CME will follow suit.
Coming into this fight between the two US exchanges are likely to be commodities brokers and banks keen to keep their share of the market. Let battle commence.