Potential Framework for Electricity Futures Trading in Singapore

Transcription

1 Potential Framework for Electricity Futures Trading in Singapore 23 October 2012 Contents 1 Singapore A Global Financial Centre 03 2 SGX at a Glance 04 3 SGX Commodities Business 08 4 Why Electricity Futures The Case for Singapore 10 5 Futures Market Development 11 6 International Experience from Nord Pool and New Zealand 13 7 Key Challenges for Singapore 20 8 Components of a Futures Market 21 9 SGX as a One-Stop Integrated Risk Management Hub Conclusion and Next Steps 24 Page 1 1

2 Singapore A Global Financial Centre Home to global companies Asia Pacific headquarters to >1/3 of Fortune 500 companies Wealth hub with largest institutional investor base in Asia >US$1.5 trillion assets under management World s 4th largest foreign exchange trading centre >US$330 billion average daily volume in 2010 Asian logistics centre World s largest bunker port and 2nd largest container port Trading centre for commodities 300 global trading companies 90 top global traders globally/regionally headquartered here 2 SGX at a Glance The Asian Gateway Global investors and companies connecting to Asian growth International listing venue Single access to Asian derivatives Central Clearing house Growing suite of commodities Post trade processing hub Asian companies and investors connecting to global capital Revenue 1 Market Cap 2 Employees US$520 million US$5.7 billion - 2nd in Asia For the financial year ended 30 June As of 30 July

3 Asian Services For Global Financial Markets Asia s only clearing services for OTC commodities and financial derivatives Multi-currency settlement for products denominated in foreign currencies Managing counter party risks for securities, derivatives and commodities Central custodian Wide range of Asian products Asia s longest trading hours 4 Delivering Asia With Global Reach Members 75% international Market Data 67,000 terminals Global index exposure Reach Technology The world s fastest trading engine Co-Location Liquidity Hubs Datacenters in Tokyo, New York, Chicago and London Trading Hours Asia s longest trading hours ASEAN Alliance Member of ASEAN Exchanges Alliance 5 3

4 Trading Asia in One Place Equity Derivatives China and India Asian companies listed in US Commodities Bonds Asia s most international listing venue Close to 800 listed companies Asia s leading ETF venue Single point access to Asian markets Covering 80% of Asia s equity markets Only exchange outside China to offer futures for exposure to China s 50 largest companies. Futures contracts on India s largest companies ETFs Bonds Large Asian companies traded on newsflow in Asian time zone as ADRs Trading: Rubber Fuel oil Copper Zinc Aluminium OTC Clearing: Rubber Coal Iron Ore Freight Energy Asia s bond centre 1446 bonds 30 countries 10 currencies, including RMB 6 SGX Commodities Business SGX seeks to become the Asian Gateway for Commodities Trading and Clearing Launch AsiaClear (2006) Acquire SICOM (2008) LME collaboration (2011) Acquire 49% EMC (2012) OTC Clearing Business focus on OTC Products on Energy, Freight & Commodities SGX AsiaClear OTC Commodities Products 1. OTC Freight Derivatives 14 contracts 2. OTC Container Swaps 4 contracts 3. OTC Oil Swaps 26 contracts 4. OTC Bulk Commodities 3 contracts 5. OTC SICOM Rubber 3 Contracts 6. OTC Options for Freight and Iron Ore Listed Commodity Futures focus on Commodities Market for Energy, Agricultural and Metals Listed Commodities Futures Products 1. SICOM TRS20 Rubber Futures 2. SICOM RSS3 Rubber Futures 3. LME-SGX Mini Copper Futures 4. LME-SGX Mini Aluminum Futures 5. LME-SGX Mini Zinc Futures 6. SGX Fuel Oil 380cst Futures 7 4

5 Next: Electricity Futures? Local participation p EMA s support International participation SGX + EMC capabilities International experience Development of a vibrant Electricity Futures Market 8 Why Electricity Futures? The Case for Singapore The Generators The Retailers The Consumers 9 5

6 Why Electricity Futures? The Generators Market Participant Business Issues Risk Today s Mitigants Benefits of using Electricity it Futures Existing Generator Maintenance schedules and unplanned outages Genco is short of electricity when supply is tight exposing it to high spot prices with subsequent PnL impact CFDs between gencos for planned outages Lock in purchase price against potentially high spot price to protect profit Existing Generator Plant optimisation - Make or buy? Non optimum plant throughputs to meet retail demand None Transparent decision making New investments - generation capacity or retail network Financing a potential investment Higher cost of capital / less financing available due inability to lock in forward electricity prices Generation some ability to sell electricity forward on a fixed price basis vs. hedging of fuel costs Retail no options today Reduced risks for investments. Lower barrier to entry for new players. 10 Why Electricity Futures? The Retailers Market Participant Business Issues Risk Today s Mitigants Benefits of using Electricity Futures Existing Retailers Growing market share and/or adjusting portfolio share Selling forward electricity to consumers (fixed price) while exposed to spot electricity pricing Retailers are back integrated into the generating companies, Lock in cost and profit margin in a fixed price contract with customers New Retailers High barriers to entry, potentially unlimited exposure to spot prices Shorting the electricity market with limited buy side options none Lock in cost and profit margin in a fixed price contract with customers 11 6

7 Why Electricity Futures? The Consumers Market Participant Business Issues Risk Today s Mitigants Benefits of using Electricity Futures Contestable Consumer Limited choice of retailers and lack of a price benchmark Impacts on competitiveness of consumer Compares 4-5 similar offers from retailers Provides price transparency which will lead to more efficient selection of retailers Non-contestable Consumer No choices Leads to inefficient consumption patterns, which do not reflect the true costs of electricity None Consumer choice - may allow better consumption behavior 12 Futures market development Standardization of contracts Clearing, listing rules Liberalisation of industry for competition Custom contract terms Exchange based trading Liquidity Broker based trading Bilateral Market maturity Source: the marketplace company 13 7

8 Typical development stages of a new market Planning and Consultation Engage the industry on contract design Training and education seminars for market participants Initial Stage Early adopters: spot market traders and market makers (eg. Gencos as MM) Limited product suite with shorter contract duration at first Concentrated trading hours to attract liquidity Wide bid-ask spread Growth Stage Financial traders commissioned to make market alongside Gencos Addition of more granular contracts t and longer dated d calendar contracts t Longer trading hours; Tighter bid-ask spread expected Initial entrance of financial speculators anticipated Steady State Addition of more sophisticated instruments (eg. Various types of options) Full fledged trading hours; Tight bid-ask spread regularly seen Active participation from both financial and spot market traders 14 Some Key Power Markets PJM P: 685 TWh F: 1650 TWh UK P: 390 TWh F: 20 TWh Nord Pool P: 400 TWh F: 1200 TWh EEX P: 314 TWh F: 1075 TWh SGP P: 42 TWh F: Nil Australia P: 205 TWh F: 225 TWh NZ P: 43 TWh F: 2 TWh Source: Cybele Capital, Internal Legend: P - Physical Market; F - Futures Market 15 8

9 Lessons from Nord Pool 1 Hydro The distribution of generation mix, along with large areas of hydro only, required great exchange of energy and capacity with varying precipitation and temperatures from year to year: Hydro dominated area provided capacity for balancing thermal areas Thermal dominated area provided energy to hydro dominated areas in dry and cold years Thermal Source: the marketplace company 16 Lessons from Nord Pool 2 Main incentives to form one common power market Disable national market concentration Regional optimization of use of power resources Initial Stage 1991 deregulated 1993 auction-based forward market 3 Products - base load, peak load and off-peak load 6 months out and physical delivery weekly & 4-week blocks (cascading to weekly) removed peak & off-peak load to concentrate liquidity into base load Growth Stage Introduce cash-settles basis Nord Pool s spot market, contracts up to 3 years 1994 Manual continuous trading 1996 E-trading started , Sweden & Finland join Forward contracts conform to needs of OTC market 1999 Options launched 2000 Contract for Difference Steady State 2003, block contracts gradually replaced with months & seasons with quarters , Nord Pool launched emission contracts 2008, international power contracts for Germany & Netherlands Nord Pool extends its opening hours 17 9

10 Lessons from Nord Pool Total volume of financial contracts traded at Nord Pool in 2009 was 1,218 TWh (about 4 times the spot volume) Source: Nord Pool / NordREG Source: the marketplace company 18 Lessons from Nord Pool 4 Total cleared volume (by NASDAQ OMX Commodities clearing house) was 2,165 TWh. Source: Nord Pool / NordREG 19 10

11 Lessons from New Zealand 1 Initial Stages 1996 NZ spot market comprising of ECNZ and Contact Energy Electricity futures was introduced by NZFOE 1999 Full retail competition post Contact Energy privatisation & ECNZ 3 way split , new retailers enter but fail to obtain proper hedge cover. 2003, EnergyHedge market, offering quarterly contracts up to 27 months out to those willing to make market at a mandatory 10% bid-ask spread. Ultimately failed (vol < 0.5% of spot vol) from lack of transparancy since non - EnergyHedge players had no access to the prices. Growth Stage 2009, ASX entered NZ market offering futures contracts at Benmore and Otahuhu, but was not successful (1 market maker with 10% spread). NZ regulator then mandated that all gencos with capacity >500 MW to put in place by 1 Jun 2010 a transparent and liquid hedge market with ccp clearing, low barrier to entry and low transaction cost. Jul 2010, all gencos agreed to become market makers with a 10% spread. NZ regulator also set a 3000 GWh target for unmatched open interest by 1 June 2011 Steady State Nov 2011, further pressure from the regulator, gencos agreed to reduce spread to 5% and increase quantities July 2012, open interest stood at 920 lots, a y-o-y increase of 224%. YTD volume as of Jul 2012 was 3758 lots, a y-o-y increase of 523%. 20 Lessons from New Zealand 2 Source: NZ Electricity Authority 21 11

12 Observations Nord Pool vs New Zealand Nord Pool Liberalisation of Nordic power markets in steady state reached in 2003 Very little vertical integration Market participant lead development Significant expansion in number and complexity of contracts over time New Zealand Full retail competition of NZ power markets steady state 2012?? Vertical integration dominates Regulator lead development More contracts to come? 22 Key Challenges for Singapore Vertical Integration 5 major gencos who are also dominant retailers Internalising risk instead of transferring risk through trading with other gencos Lack of inter-gencos trading may discourage consumers trading appetite Market Concentration Small number of market participants No trading anonymity when hedging with other gencos Exposes its positions and strategies to competitors As a consequence, market participants i choose to internalise risk Low Paper Trading Appetite A consequence of market participants internalising risk A hindrance for futures market development?? 23 12

13 Integrated Risk Management Strategy Process Optimisation Highly volatile prices Seasonal effects Significant P&L exposure Solution: Hedge feed costs with oil and gas derivatives and options Generation Maintenance Schedules Unplanned outages Fluctuating Demand Solution: Lock in margins (oil and gas vs. electricity) and reduce PnL exposure Retail Varying consumption patterns Varying customer risk appetites Flexible contract structures required Solution: Hedge in the electricity futures market to enable more innovative product offerings Derivatives exist which allow these risks to be transferred from the risk averse to the risk seeking 24 Conclusion and Next Steps SGX brings Technology and capital to support a new market 35 Clearing Member firms Cross margining benefits across a broad range of energy products Innovative collateral management, to keep margin costs down Building Singapore s power complex with Electricity futures Fuel Oil futures OTC swaps in fuel oil, gas oil and LNG (in the future) Benefitting all market participants in Singapore Gencos spark spread exposure completely hedgeable with minimal basis risk New retailers able to enter the market using electricity futures to hedge their costs Existing retailers able to use electricity futures in the of design longer term / more innovative products Consumers are empowered by choice, leading to improved energy efficiencies SGX and EMC together will work closely with the regulators and market participants to develop a vibrant electricity futures market that meets the needs of all stakeholders 25 13

14 Q & A 26 Components of a Futures Market 1. Regulation and Oversight SGX as futures market operator is governed by the SFA and SFR and regulated by the Monetary Authority of Singapore (MAS). 2. Clearing House is the central counterparty to every transaction. It guarantees the transaction by becoming the seller to the buyer and the buyer to the seller (novation). 3. Clearing Members qualified financial institutions who are permitted to settle directly with Clearing House and act as the first level of financial guarantor for the performance of each transaction. 4. Margin good faith deposit put up by Clearing Members and their customers to guarantee the performance of the obligations associated with a cleared transaction. 5. Initial Margin the minimum amount of funds or collaterals per contract required to initiate a futures position. 6. Maintenance Margin the minimum amount of funds or collaterals per contract to be maintained before needing to be replenished

15 Components of a Futures Market (Cont d) 7. Margin Collateral cash or other acceptable instruments (gov securities, Bank Guarantees, Letter of Credits, stocks) used to satisfy margin requirements. 8. Mark-to-Market evaluate the current fair value of positions. It serves to prevent the accumulation of market losses. 9. Margin Call a call requesting that additional deposit be made to bring the margin back up to the initial margin amount. 10. Position Limit the limit imposed by the exchange on the total number of contracts which any single person can hold. This is to ensure that no single person can control the market price of a particular commodity. 11. Daily Settlement Price the price at which an open futures position is marked-to-market or revalued at the end of the day. 12. Final / Cash Settlement Price the price at which a cash-settled futures contract is settled at maturity. 28 Thank You Singapore Exchange London Tokyo Beijing 2 Shenton Way, #19-00 SGX Centre 1, Singapore Main: (65) Fax: (65) This presentation is being made available to certain authorized recipients for their general information only. While SGX and its affiliates have taken reasonable care to ensure the accuracy and completeness of the information provided in this presentation, they will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Neither SGX nor any of its affiliates shall be liable for the content of information provided by or quoted from third parties. Examples provided are for illustrative purposes only. The information in this presentation is subject to change without notice. Any recirculation, transmission or distribution of this presentation or any part thereof by any third party requires the prior written permission of SGX. SGX and its affiliates disclaim all responsibility and liability arising in connection with any unauthorised recirculation, transmission or distribution of this presentation or any part thereof. SGX Ltd, November 2010 SGX The Asian Gateway 29 15