The main reason behind the downward trend in EU carbon traded volumes since the start of the year is banks’ lower risk appetite for proprietary trading on the back of higher capital requirements, according to a brokers’ association.
EU carbon quarterly volumes have fallen steadily since the start of 2013, mainly because of a slump in trade done over the counter, while exchange volumes kept more stable.
According to the London Energy Brokers’ Association (LEBA) – which groups brokers Evolution Markets, GFI Group, ICAP, Marex Spectron, Tradition Financial Services and Tullett Prebon Energy – this is mainly due to banks taking on less risk.
“The main reason for [the decline] is the financial institutions scaling back their trading activity resulting from a reappraisal of the amount of assets they are willing to invest in the commodity markets generally,” a LEBA analyst told ICIS. “The experience in other commodity classes is that the major banks haven’t been driving liquidity in 2013 to the same extent that they were previously... Under Bank of England guidelines and the forthcoming implementation of Basel III the banks are required to keep strong capital ratios and this has had an impact on some aspects of their trading and their proprietary appetite for risk,” he said.
Basel III is a set of reform measures, developed by the Basel Committee on Banking Supervision, strengthening the regulation, supervision and risk management of the banking sector, endorsed by the G20 in 2010 ( see sister publication EDEM 12 November 2010 ). To make banks better placed to absorb economic shocks, the package increased their capital requirements. The standards will be gradually stepped up during the transitional period up to 2019.
It has been previously suggested that as a result, banks would move capital to those areas of trading with higher returns, as the new standards would make even more expensive the already costly commodities trading ( see sister publication EDEM 10 January 2012 ).
“That has been a big factor,” a source at one of the six brokers said, “plus the uncertainty over carbon future as a viable robust market.”
A measure to prop up carbon prices in the short term by back-loading some supply has been stuck in the EU legislative process for months and there is no firm news on subsequent structural reform of the EU emissions trading system.
“There have also been a series of high-profile traders leaving bank trading teams in the last 18 months,” the LEBA analyst added.
A source at another broker previously mentioned the delay of the free allocation of emissions allowances to industrials as another reason why volumes are falling more steeply in the second half of the year than in the first ( see EDCM October 2013 ). Silvia Molteni