Agenda. NASDAQ OMX Commodities Financial Derivatives Markets 1/27/2012. Turkish Electricity Producers Association. NASDAX OMX Commodities

Transcription

1 UK POWER DERIVATIVES NASDAQ OM Commodities Financial Derivatives Markets Turkish Electricity Producers Association Jukka Nygren Agenda NASDA OM Commodities Regulatory Development Nordic Financial Power Market Nordic Products Clearing 2 1

2 European Power Exchanges 3 Combining Industry Leading Innovators Nord Pool ASA World s largest exchange company Multi-asset, t multi-service i capabilities in trading, clearing, listing, information services and trading technology Covers widest geography with its large number of listings 3,900 companies in 39 countries Executes more transactions than any other exchange Europe s leading power exchange #1 in traded and cleared power volumes in Europe Highest liquidity in Europe in terms of volumes and transactions Among the largest carbon exchanges in the world 420 members in 21 countries NASDAQ OM Commodities 4 2

3 Commodities Equals Exchange and Clearing 5 An International Energy Exchange 3

4 Multiple Products Creating a liquid cross commodity trading platform with transparency and trust Existing products New products Power UK Power Nordic Power German Power Dutch Power Emissions EUA CER Gas Coal Freight Other Spot, Futures, Forwards, Options and Swaps Exchange and OTC Cleared Cleared Volumes TWh Cleared Volumes NOMC, EE Yearly EE NOMC 4

5 Elements in a Well-Functioning Market Liquidity - Prices available at all times Transparency - Bid- and Ask-spreads and volumes are visible for all - Adhoc-information Secure counterpart - CCP Clearing Members Equality - Information (UMM, prices, other external and internal info) Market surveillance - Compliance with regulations and transactions/insider trading RESULT: Confidence in the pricing and transparency of the market Regulatory Development 5

6 Regulatory Regime EU Market Abuse Directive National Legislation FSA (Kredittilsynet) Market Conduct Rules Market Surveillance Market Surveillance Prohibition against dissemination of misleading information and equivalent Market behaviour. Manipulation Prohibition against trading on information which is not available to the market. Insider Trading Disclosure Requirements (pre-trade and posttrade) Duty to share certain information with the market. Duty to: Monitor trading activity Investigate possible breaches Report to supervisory authorities 6

7 From Bilateral to Cleared Trading OTC Market/ Bilateral trading Trading participants i t Trading participants i t Market with Prime Brokers/ Multilateral trading Trading participants Prime brokers Cleared Market/ Exchange trading Trading participants Exchange/ Clearing house Trading participants Trading participants Liquidity indicators Stability indicators Dimension Low Med High Market information Transaction cost Matching efficiency Counterparty risk Regulation Operational risk Transparency Dimension Low Med High Market information Transaction cost Matching efficiency Counterparty risk Regulation Operational risk Transparency Dimension Low Med High Market information Transaction cost Matching efficiency Counterparty risk Regulation Operational risk Transparency Ongoing EU Regulatory Changes EMIR (European Market Infrastructures Regulation, in force ~2013) - CCP clearing of OTC derivatives + reporting to trade repository. Some exemptions for nonfinancials. - Regime for the functioning of the CCP - Member financed default fund new for NASDAQ OM - Types of collateral accepted: - For all: Cash + highly liquid assets/financial instruments? - For non-financials: Letters of credit / bank guarantees? MiFID (Markets in Financial Instruments Directive, in force ~2014) - Push standardisation of derivatives contracts organised trading facility (OTF?) - Review exemptions for energy specialized dealers - Introduce position reporting / management / limits - Definition of Financial Instruments & classify EUAs as financial instrument REMIT (Regulation for Energy Markets Integrity and Transparency, in force ~2013) - A tailor-made market abuse regime for wholesale energy markets - Definition of insider information for commodity derivatives. Moving -from what market participants would expect to receive -to information that would be likely to have a significant effect on the prices 14 7

8 16 1/27/2012 Conclusions and Long Term Vision Regulation will cover more asset classes and will be tighter Overall tighter regulation New Regulation for OTC derivatives We will see fewer trading venues Consolidation to continue More instruments and asset classes will be available on trading venues More broadly and better organized trading 15 Nordic Financial Power Market 8

9 Nordic Power Markets Nordic physical market Exchange Physical markets Derivatives trading 5 times underlying 400 TWh Consumption >360 Members in physical (spot) and financial exchanges Nord Pool 74 % OTC 26 % TWh 2, Market Turnover TWh Turnover All Nordic Markets December 31, Spot Exchange OTC 9

10 Reasons to Trade Spot market - Buying and selling power for immediate use - Quantity -Pricefixingtoday - Physical delivery Financial market - Trading contracts for the future - Financial compensation for price movements. - No physical delivery Today Days and weeks... 6 years ahead Risk management (hedging) Insurance against future price movements in the spot price - Producers: Lock in a sales price - Consumers: Lock in the price for future power needs - As a part of an investement portfolio where the investor s profit is correlated with power prices Speculation Place bets on movements in the future power price Need for Risk Management Products EUR/MWh Spot and Forward Prices December 31, NP Spot (weekly) Month Fwd Q & Yr Fwd 10

11 Nordic Front Year Forward Prices 21 Price Determining Factors Spot Market Hydrological balance Temperature Wind Weather prognosis max. for 10 days The Financial Market Spot price CO 2 prices Prices for coal, gas, oil Freight prices Expected production and consumption Other Factors include Cross-border capacity Psychology Regulation Currency Macro economics 11

12 Liquid Wholesale Market No. Transactions Number of Transactions Nordic Power Market December 31, Exchange OTC Transactions per Product Group Number of Transactions Nordic Power Market 31 December, Base Year Base Quarter Base Month Base Week Base Day Deals OTC Deals 24 12

13 Market Shares Customers Market Shares per Customer Category Monthly TWh 80% 70% 60% 50% 40% 30% 20% 10% 0% jan-09 jul-09 jan-10 jul-10 jan-11 jul Turnover Credit Institution Finance/Fund Fundamental 25 Market Share Exchange vs. OTC Market Share NOMC Europe Financial Market 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 55.5% 56.0% 61.6% 59.7% 45.9% 30.9% 32.8% 37.4% 35.5% 5% Nord Pool Exchange Nord Pool OTC 13

14 Nordic Products What is a Financial Derivative Derivative: A contract whose price depends on (or is derived from) another price or index. For example from Nord Pool s system price, which is called the underlying) Financial contract: A cash settled, non physically delivered contract

15 Nordic Power All contracts Min trade = 1MW Min ticker size = to CET PowerClick, Orc, CQG, Trayport and voice execution NASDAQ OM Commodities = Counterparty t Reduced margin calls by netting power and CO2 contracts Base load Mon-Sun Peak load Mon-Fri Power Forwards Months/Quarters/Years EUR Base load /Peak load Ticker example = ENOMSEP-11 Cash settled Options Base load EUR Ticker example = ENOPYR2DEC1-38 Call/Put Options Futures Days/Weeks EUR Base load /Peak load Ticker example = ENOW18-11 Cash settled CFDs Contracts for difference EUR Months/Quarters/Years Ticker example = SYSTOYR-13 9 CFDs 29 Futures and Forwards Contracts Futures Forwards Settled daily during the trading Settled daily during the delivery period (mark to market) + during period (accumulated mark-to-market the delivery period (spot + spot reference cash settlement) reference cash settlement) Trading Delivery/Settlement 15

16 Product Structure Futures(base) Day(24h) and week(168h) D W 1 year 2 year 3 year 4 year 5 year 6 year M M Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 YR: YR: YR: YR: YR: YR: 1/1-12/31 1/1-12/31 1/1-12/31 1/1-12/31 1/1-12/31 1/1-12/31 Forwards(base) Month( h), Quarter( h) and Year( h) The content of a product is based on the Western calendar. Base 24h/Peak 12h ENO Base : 10 Days, 6 Weeks, 6 Months, 2 rolling years in Quarters and 6 Years Peak : 5 Weeks, 2 Months, 3 Quarters, 1 Year Contract for Difference (CfD) Congestions between different areas can result in different area prices. This means that there is also an area price risk for the Nordic market players in addition to the system price risk. Contract for difference (CFD): Is a forward-contract with reference to the difference between the area price and the Nord Pool Nordic Spot system price. The market price of a CfD during the trading period reflects the markets prediction of the price difference during the delivery period. 16

17 Trading Hours and Closing Prices Closing Prices available: - Nordic power market between and CET. - German and Dutch power market between and CET. - UK power and gas market between and CET. - Carbon market between and CET. 33 Clearing 17

18 Clearing and settlement principles D A NASDAQ OM Stockholm AB C B Clearinghouse acts as a central counterparty (CCP) to all members. Clearing of all Exchange traded contracts and standardized OTC contracts. Netting of positions enabling members to utilize their capital in efficient manner. SPAN margin call calculation system to calculate the daily margin call for each member Daily settlement is automatic, and the members are connected through variety of multinational settlement banks. Market participants clearing contracts must provide collateral covering their daily margin call. Acceptable collateral are cash on a pledged bank account and/or an on-demand guarantee. 35 Clearing member categories General Clearing Member Clearing Member A credit institution or investment firm that has been approved by Nasdaq OM Stockholm AB for clearing of principal transactions and client transactions. An entity that has been approved by Nasdaq OM Stockholm AB for clearing of principal transactions. Client Representative A Clearing Member representing Clearing Clients in respect of trading. Clearing Client An entity that has been approved by Nasdaq OM Stockholm AB to have transactions subject to clearing through a Client Representative

19 Collateral call in financial markets Base Collateral Covers overnight-risk for new trades Depending on internal rating: member category, financial strength, exposure, activity Daily Margin Call Variation Margin (aggregated unrealized profit/loss) Initial Margin (expected market risk during a close-out period) Extraordinary Margin Call In special circumstances: major price changes, high market shares, changes to the financial situation or rating Variation margin Mark-to-market value Base Collateral Daily margin call Initial margin Calculated with SPAN risk model. Extra Ordinary Margin Call Cash margin Base collateral Daily margin call Variation margin Initial margin Daily Clearing Routines for Nordic Power Trading day T (CET) Clearing Day T+1 (CET) 08:00 Start of Trading Hours 07:00 Start of Clearing Hours 15:25-15:30 Daily Closing Prices (DCP) determined (random time) 15:30 End of Trading Hours 16:00 End of Clearing Hours 16:30 Final Allocation Time Clearing Confirmations issued 17:00 Final Clearing Complaint Time 17:20 Final Correction Time 07:10 08:30 10:00 11:00 Daily Margin Call / Settlement are calculated Statement of Account available to members Cash Settlements owing to and from the Clearinghouse initiated Final collateral time 19

20 Thank You For further inquiries: Phone Appendices 20

21 Clearing fees for Power Effective from 1. April 2011 (exchange trading and otc clearing) Fee step Annual fee Clearing fee ** (for all ( /a) (c/mwh) customers) Normal Clearing Customer ,850 Small Clearing Customer 750 1,500 ** For large volumes: clearing fees declines from 0,850 to 0,350 c/mwh Trading fees for Power Effective from 1. April 2011 (exchange trading) Exchange Member Annual fee ( /a) ,400 Trading fee (c/mwh) 21

22 CO2 prices EUR/tCO2 EUA and CER prices Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 EUADEC-12 EUADEC-13 CERDEC-12 All NASDAQ OM Carbon Products European Union Allowances (EUA) phase II and III Physical forward and futures contracts for EUA option contracts EUA spot contracts CER/EUA spread, SWAP and STRIP Certified Emission Reduction (CER) phase II Physical forward and futures contracts for CER option contracts CER spot contracts In accordance with the EU ETS directive (excluding projects related to nuclear power production, land use, land use change, forestry and hydroelectric power generation exceeding 20 MW). CERs that have been surrendered for compliance within the EU allowance Scheme are also excluded from trading and clearing UK registry as NPC delivery point 22

23 All EUAs All contracts Min trade 1 lot = 1,000tCO₂ to CET (12.00 on expiry) PowerClick, Orc, CQG, Trayport and voice execution Trading/Clearing combined /tco₂ OTC Clearing also /tco₂ NASDAQ OM Commodities = Counterparty Reduced margin calls by netting CO₂ and power contract margin calls as well as EUA/CERs Cash settlement at T+3 for a seller, T+1 for a buyer EUA Spot Daily contract Ticker example = EUAD Physical delivery Pre-delivery allowances/cash options 24h prior Delivery Clearing registry account Cash settlement T+3 for seller, T+1 for buyer EUA Futures Ticker example = NEDEC0 NASDAQ OM Commodities = Counterparty Reduced margin calls by netting CO₂ and power contract margin calls Standard industry future contract Daily cash settlement EUA Options Expiry = 3 exchange trading days before contract ends Ticker example = NECDEC0-15 or NEPDEC-15 8 monthly contracts each with quarterly expiry Contracts listed out to DEC12 NASDAQ OM Commodities = Counterparty Netting CO₂ and power contract margin calls Resulting future clearing fee free Holder can refuse automatic execution No exercise fee EUA Forwards Yearly contracts Ticker example = EUADEC2010 Delivery Clearing registry account Cash settlement at T+3 for a seller, T+1 for a buyer No cash settlement during trading period 45 All CERs All contracts Min trade 1 lot = 1,000tCO₂ to CET (12.00 on expiry) PowerClick, Orc, CQG, Trayport and voice execution Trading/Clearing combined /tco₂ OTC Clearing also /tco₂ NASDAQ OM Commodities = Counterparty Reduced margin calls by netting CO₂ and power contract margin calls as well as EUA/CERs Cash settlement at T+3 for a seller, T+1 for a buyer CER Spot Daily contract Ticker example = CERD Physical delivery Pre-delivery of allowances/cash options Delivery Clearing registry account CER Futures Quarterly contracts up to March 2013 Expiry industry standard Ticker example = NCDEC0 Pre-delivery = Lower margins Delivery Clearing registry account Industry standardised future contract Daily cash settlement CER Options Expiry = 3 exchange trading days before contract ends Ticker example = NCCDEC0-13 or NCPDEC-13 8 monthly contracts each with quarterly expiry Contracts listed out to DEC12 Netting CO₂ and power margin calls No option exercise fee Automatic execution not mandatory CER Forwards Yearly contracts Ticker example = CERDEC2010 Delivery Clearing registry account Cash settlement T+3 for seller, T+1 for buyer No cash settlement during the trading period

24 24