COMMODITY EXCHANGES
commodities) is likely to be interested in acquiring the Paris markets, which would provide regional diversification, with interest also likely from Asian exchanges. [CME’s recent acquisitions also include the Kansas City Board of Trade (KCBT)]. The big news in European gas markets last year
was the announcement of ICE’s acquisition of APX-Endex’s Derivatives and Spot Gas business in September. The deal will see the futures exchange market for the largest European gas contract (TTF) shrink by half (from two exchanges to one). It also brings the spot and futures market for UK gas onto one exchange operator. In addition, during November, the European
Energy Exchange (EEX) and Powernext announced the development of a Pan-European gas market collaboration to offer EEX’s TTF and German gas markets alongside Powernext’s PEG market.
“It is still too early to estimate the
full impact of the new regulations on liquidity in the derivatives market”
European gas is a predominantly brokered
market but is being tested as exchanges grow their market share. Gas is the volume growth story in Europe during for 2012 – with a double digit increase in trading volume vs 2011. TTF grew to end the year almost half the size of UK gas, up from just over a third the size the previous year while German gas volumes were significantly higher. Meanwhile, the move by several utilities active in
the UK Power markets to auction a large percentage their day-ahead volume through the N2EX auction hit UK power derivative market volumes.
Changing Structure of Traded Markets Modest growth in the developed world is being
eclipsed by robust volume developments in Asian markets, indicating how rapidly emerging markets are gaining ground on the major European and US exchanges. While many global exchanges saw volume declines in 2012, commodity exchanges (and the commodity divisions of diversified exchanges) have bucked the trend, delivering strong (sometimes spectacular) trading growth for the year as whole. At the same time, commodity clearing services
have expanded as member firms and their customers move to comply with the legislative programmes being rolled out. The development of advanced technology solutions – critical in expanding volume growth in mature markets – is also at the forefront. Most major commodity exchanges have already shifted to near 24-hour trading cycles as China’s rise has spurred demand
12 March 2013
for Asia-hours activity, while hedge funds and high-frequency traders have clamoured for greater access. That requires cutting- edge technology and an expanding product portfolio. Here, partnerships with leading technology service providers have proved vital to efforts in supporting exchange members in optimising their trading strategies and maximising profits. Traded commodity market are undergoing radical
transformation which is set to accelerate in 2013 because of much anticipated implementation of rules that will govern global markets. These include measures such as position limits, mandatory clearing and margin requirements, capital requirements, pre- and post- trade transparency through position reporting requirements to trade repositories, as well as trading standardised swaps on designated contract organisations (swap execution facilities) where multiple traders can place bids and offers, with real-time reporting of cleared and uncleared swaps to the centralised swap data repositories. “These changing dynamics present new challenges not only for
financial speculators who buy or sell any asset in the anticipation of a price change, but also for traditional companies that use previously unregulated financial derivative instruments to hedge or mitigate commercial risk,” says Bahattin Buyuksahin, Senior Analyst with the IEA in Paris. A closer look at the new rules suggests that lingering difficulties
remain and that the process of regulatory market reform will be ongoing. A good example of this is the recent decision by US regulators to side with CME Group in a controversial battle over the way customers must report their off-exchange derivatives deals to comply with tough new rules. Regulatory uncertainties persist whilst inconsistencies within and across jurisdictions could, ironically, lead to less transparent and more risky global financial markets. Participants are already searching for ways to escape from the costly and complex regulations of the swaps market. The new rules suggests some interesting implications for commodity exchanges. Aside from cross-border disputes, in the presence of regulatory arbitrage, there are concerns that market participants may increasingly seek out jurisdictions with less strict regulations, thereby shifting risk rather than mitigating it. Here again, the exchanges of the emerging markets would seem to be at an advantage. “It is still too early to estimate the full impact of the new
regulations on liquidity in the derivatives market and the cost associated with these rules. The implementation of some of the rules has just started, and some of the rules, including rules on swap execution facilities, capital and margin rules, and the Volcker Rule, still need to be finalised...,” explains Buyuksahin. Big exchanges stand to gain from even a small shift towards
futures and away from swaps whereas the big dealer banks and the interdealer brokers stand to lose out. The debate continues as to whether the regulatory pendulum has swung too far. Policymakers – as well as banks, investors, and other market
participants – are shaping a more sustainable model of financial market development. Commodity exchanges remain a fundamental element in that process. •
www.commodities-now.com
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