SUSTAINABLE CLEARING – WHERE ARE WE?


The primary role of derivatives markets is to manage risk and those markets are already evolving to find their place in the energy transition.


A fundamental purpose of derivative markets is to allow producers, traders and consumers of commodities to manage price risk and hedge their exposures so that they can plan the development of their business regardless of short term market volatility.


The role of central clearing is one that is critical to efficient and safe financial markets. Counterparty credit risks are effectively mutualised between the clearing house and its members, creating a robust and resilient ecosystem which both strengthens markets and provides resilience to black swan events. Time and again that resilience has been tested, whether by the 2008 financial crisis or the invasion of Ukraine by Russia in 2022. History shows us that central clearing is vital to managing credit and default risk in financial markets with clearing houses and member firms providing large scale “skin in the game” liquidity and default capital.


As the global economy adapts to meet the challenges of climate change, we will see demand for traditional energy from fossil fuels decline as new energy sources gain traction and demand grows. With this will come the need for those producers, traders and consumers of energy to be able to hedge their price risk to those new energy sources.


There is also an increasing political will from governments and


other international organisations. We already have a broad range of carbon emissions schemes that have centrally cleared derivative products and where trading volumes continue to grow as those markets develop. The recently confirmed EU programme to decarbonise the maritime transport sector will see shipping emissions included in the EU Emissions Trading System for the first time, driving continued growth in that particular product.


The main exchange and clearing players including CME Group (CME) Intercontinental Exchange (ICE), Singapore Exchange (SGX), European Energy Exchange (EEX) and Nodal now offer a broad range of sustainable clearing products covering carbon emissions, renewable energy sources, biofuels and battery metals as well as cleaner fossil fuels. Investors seeking exposure to sustainability more generally are also able to trade and clear a number of sustainable index products on exchange.


Unsurprisingly, CME and ICE offer the fullest range of sustainable clearing products, covering not just carbon emissions but also water, wind and solar in the renewables space as well as a number of biofuels including used cooking oil (UCO and UCOME), ethanol, biodiesel (FAME and RME), the US renewable fuels standard (RVO) and methanol. Trading and clearing of battery metal contracts including cobalt and lithium is offered by both CME and SGX.


The sustainability index products include global carbon futures, corporate and sovereign climate and carbon contracts and the S&P ESG 500 index which measures the performance of securities meeting sustainability criteria, while maintaining similar overall industry weights as the S&P 500.


14 | ADMISI - The Ghost In The Machine | Sustainability Edition 2023


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