Return of funds driving new growth in cleared European power and gas markets

The return of financial funds to energy commodity trading has driven growth in volume at two major European exchanges, senior executives from both companies have said.

After years of declining Nordic power volume on the Nasdaq futures platform, the trend shifted for the first time since 2010 into year-on-year growth in the first half of this year.

Vice-president Bjorn Sibbern said the rebound was a sign the market may have hit the bottom in late 2015, when Nordic wholesale power prices reached record lows mainly driven by oversupplied hydropower stocks and declining energy commodity prices.

“We have found a new positive momentum. There is a renewed interest for the Nordic power markets,” Sibbern said in an interview at the exchange’s London office.

Some of this interest comes from financial funds, Sibbern added.

And echoing those comments, Steffen Kohler, chief operating officer at commodity derivatives platform EEX declared recently that “the banks are back”. This was in reference to growth in volume being traded by financial funds in the German, French and Italian power derivatives markets via banks that offer direct market access.

“Funds are coming back and investing into the market,” Kohler said.

Declining volume

Since the financial crisis in 2007-08, the turnover of financially-settled power contracts traded on Nasdaq has fallen every year, with the exception of 2010. In the first half of 2008, Nordic power volume peaked at close to 748TWh. Seven years later, in 2015, turnover was half this.

However, during the first seven months of 2016, from January to the end of July, electricity traded in the Nordic futures market rose year-on-year by 11% from 386TWh to 429TWh, latest exchange data showed.

Nordic power futures liquidity has been aided by growing volatility in fuels prices since the start of this year, which has seen a rebound in the Brent crude benchmark since February coupled with growing coal prices.

“For many years, [financial funds] have been less interested because of a lack of volatility and falling power prices, but now I see this is swinging back,” Sibbern said.

“I have heard anecdotally about old power traders who were out of the market that are now coming back.”

EEX’s Kohler also echoed this point, affirming that financial funds look for liquidity and, to a lesser extent, volatility. Therefore growth in volatility has encouraged liquidity which has pulled in the funds.

Financial institutions account for around a third of the market share on Nasdaq, while utilities and physical participants continue to dominate with almost two thirds of traded volume, according to exchange data.

On EEX’s power futures, the numbers would be broadly similar for the more liquid markets such as German power, Kohler said.

Growth potential

Elsewhere in Europe, Sibbern sees potential for further growth into markets that have long been dominated by over-the-counter trade, such as Germany and France, much of which will be driven by the broker-cleared segment.

“When we went into the German market [in 2008], only 15% of the market was cleared, whereas in the Nordic region we had been used to almost 100%. Today, cleared trading accounts for more than 40% of the German market,” he said.

The growth of broker-cleared trade in some markets, which limits counterparty risk by clearing transactions entered into on broker screens through a central clearing house, has also aided the exchange business model. By extension, it also has the potential to grow the broker business.

While many market participants are at odds with a tougher regulatory regime under MiFID II, scheduled to be in effect from January 2018, Nasdaq’s vice-president acknowledged that a growing need to clear trade will assist part of its business.

“It is too early to say something clear on MiFID [II] before we have all the details ready. For Nasdaq, it is good that more trades are cleared. The regulator’s push towards cleared trading is helping us in new markets like Germany and France.”

But, Sibbern added: “There is no upside in the Nordic region since almost all power is cleared already.” herman.moestue@icis.com and jamie.stewart@icis.com