Trade at Nord Pool s Financial Market Copyright Nord Pool ASA Oslo Stockholm Fredericia - Helsinki 1 April, 2004 Nord Pool s Financial Market
Content Introduction... 3 1. History of Nord Pool s Financial Market... 4 1.1. Timeline...4 1.2. Financial Market Overview...6 2. The Financial Market at Nord Pool... 7 2.1. Futures Contracts...8 2.2. Forward Contracts...10 2.3. Contracts for Difference (CfD)...12 2.4. Option Contracts...14 2.5 Electricity certificates...16 3. Trading in Nord Pool s Financial Market...17 3.1. Daily routines...18 3.2. PowerCLICK Exchange trading system...18 3.3. Trading via Telephone...20 4. Traded Volume Growth...21 Trade at Nord Pool s Financial Market 2
Introduction This report on Nord Pool s financial market is intended for introductory-level training at organisations involved in electric power markets and as a guide for the general public. The report is part of a four-part series prepared by the Corporate Communications department of Nord Pool the Nordic Power Exchange. These reports provide an overview of the Nordic power system, the Nordic power market s infrastructure, key concepts in the restructured Nordic power market, the spot and financial markets, types of electricity contracts, clearing services, trading activities and members. The report series and contents are summarised below: The Nordic Power Market A short presentation of the power system Roles and responsibilities of key companies, such as grid owners, system operators, the Nordic Power Exchange and its participants Transition from national power markets to a unified Nordic power market Wholesale and retail power markets Trading activities and prices at Nord Pool s markets and in OTC and bilateral markets Trade at the Nordic Spot Market (Nord Pool Spot AS) Discussion of the spot market auction trade concept Daily trading activity a timeline from bidding to financial settlement of traded spot contracts Establishing area prices to handle grid capacity bottlenecks Settlement and pricing of imbalances Trade at Nord Pool s Financial Market Product description of financial electricity contracts (futures, forward, CfDs, options and Electricity certificates) Electronic trading system and trade via the financial desk Trading procedure Financial settlement Summary of risk management, collateral and clearing routines Market information Clearing Services Offered by Nord Pool Clearing ASA - Interface between trading and clearing Roles and responsibilities of settlement banks, clearing members, and Nord Pool Clearing Cash flow in clearing Determination of collateral Risk management and market monitoring Structure of agreements between parties involved Copies of this report are available from Nord Pool, or they can be downloaded from Nord Pool s website: www.nordpool.com Trade at Nord Pool s Financial Market 3
1. History of Nord Pool s Financial Market Deregulation of the Nordic power market began in Norway when the country s energy act, aimed at restructuring and liberalising power market trade, went into effect on 1 January 1991. Nord Pool (then Statnett Marked AS) established a forward market in 1993; this market used an auction trade system, with physical delivery of the traded power contracts. After a testing period focused on the preferences of participants, the forward market was established, with three products with physical delivery at maturity. MW Peak Power (75 hours per week) Off-peak Power (93 hours per week) The traded products initially comprised base load contracts, peak load contracts, and offpeak load contracts, all with a time horizon of up to six months. Base Power (168 hours per week) Mon. Tues. Wed. Thurs. Fri. Sat. Sun. All three contract types listed for trade covered a single calendar week, or blocks that comprised four weeks. As the maturity date approached, block forwards were split into weeks, in accordance with product specifications. 1.1. Timeline As the Nordic power market developed, experience showed that the forward power contracts concept needed to change to increase liquidity and promote trade. Nord Pool s financial market concept evolved as follows: In the period 1993-1994, peak load contracts and off-peak load contracts were removed from exchange trading, due to low activity and in order to concentrate trading liquidity into base load contracts. Trade at Nord Pool s Financial Market 4
In 1994, the financial market s weekly auction trading system was replaced by a continuous trading system, with bids written on a whiteboard on the trading floor. All bidding, price quotation and execution of trades were carried out by phone between market participants and the trading floor at Nord Pool. To promote trading by new market participants and stimulate greater liquidity, the financial contracts were changed from physical-delivery contracts to financial electricity contracts with only cash settlement at maturity. The reference price for all financial contracts was the system price of Nord Pool s spot market. The time horizon of listed contracts was increased in stages to three years. On 1 January 1996, Sweden joined the markets organised by Nord Pool and the first multinational exchange for trading of electrical power was formed. In the fall of 1996, the PowerCLICK electronic trading system developed by Sweden s OM Group replaced the trading floor s manual whiteboard. Nord Pool introduced trade in financially settled forward power contracts in 1997. Because non-exchange trade activity in forward contracts was very high, Nord Pool standardised the forwards to conform them to the OTC market. A similar potential was observed in the trading of option contracts. This lead to options being launched as standardised products at Nord Pool in 1999. In 2000, after completing unification of the four neighbouring Nordic countries into a common power market, Contracts for Difference (CfD) were introduced as a new forward product. Contracts for Difference were introduced to give market participants listed products for hedging against possible price differentials between the Elspot System and individual area prices. In 2003, a new product structure was gradually introduced replacing blocks with months and seasons with quarters, allowing Nord Pool contracts to be more compatible with international standards. In 2004, Nord Pool launched its first product related to renewable energy production. The product will be listed as the Swedish green certificates ( elcertificate ). Nord Pool is the first European commodity exchange to offer a standard exchange traded contract for green certificates. On 1 May 2003, Sweden became the first Nordic country to introduce a system for green certificates. The elcertificates are subject to quotas for Swedish consumers, with the exception of certain heavy industries. The purpose of this program is to provide an incentive for investments in renewable energy production. All contracts with delivery period after 2006 will be listed in Euros rather than Norwegian Crowns. This allows for easier cross-border trade and further standardisation with other products and exchanges. Trade at Nord Pool s Financial Market 5
1.2. Financial Market Overview At present the contract types traded on Nord Pool s Financial Market comprise of both power derivates and electricity certificates. The derivates are base load futures, forwards, options, and Contracts for Difference. The reference price for these contracts is the System Price of the total Nordic power market. The maximum trading time horizon is currently four years. There is no physical delivery of financial market electricity contracts. Cash settlement is made throughout the delivery period, starting at the due date of each contact. The initial contract launched for the electricity certificates market is a spot contract with physical delivery. The Nord Pool group consists of Nord Pool ASA, running the financial market; Nord Pool Spot AS, running the physical-delivery spot markets; and Nord Pool Clearing ASA, running the electricity contract clearing services. Nord Pool Clearing, clears all contracts traded on the Nordic Power Exchange. Nord Pool Clearing also clears contracts traded in the bilateral financial markets that are registered for clearing an important service for the Nordic power markets. Market projections indicate that trade in financial contracts will predominate in the developing European market. The reference prices will be spot prices and indexes based on spot prices and OTC prices. Seller pays buyer Seller 100 MW Price hedging settlement Physical trade through Nord Pool Price Nord Pool Elspot System Price Financial contract price Time Buyer 100 MW Buyer pays seller Financial contracts are entered into without regard to technical conditions, such as grid congestion, access to capacity, and other technical restrictions. Price hedging based on financial contracts at power exchanges or in the bilateral market, combined with physical procurement at national or regional spot markets approximates a hedge. A key tool in risk management, this method of hedging has largely replaced traditional bilateral trade in physicaldelivery contracts. As power markets become more tightly integrated, physical trading Trade at Nord Pool s Financial Market 6
strategies become more difficult to carry out. A high level of trade activity in traditional physical contracts would require rather complex monitoring of a large number of contracts across different transmission system operator areas and of interconnections. 2. The Financial Market at Nord Pool All financial power contracts are cash-settled. They have been designed to satisfy the needs of various participants: Generators, retailers and end-users who use the products as risk management tools. Traders who profit from volatility in the power market, and contribute to high liquidity and trade activity. Prior to the introduction of financially settled forwards in 1997, the time horizon of the futures market was about three years ahead in time. Most trading activity and liquidity were concentrated in contracts at the near end of the time horizon. In the OTC market, however, considerable trade in standardised season contracts and year contracts at the far end of the time horizon was conducted. Nord Pool adapted to the non-exchange trading patterns by launching forwards that were standardised in the same manner as in the OTC market, and that offered a time horizon of up to four years. The time horizon for futures contracts was reduced from three years to 8-12 months. Forward contracts were listed up to four years ahead. At the beginning of 2003, Nord Pool began to make new changes to its product structure. The futures horizon was shortened to 8-9 weeks ahead, where the remaining contracts up to four years ahead are listed as forwards. The current product structure is undergoing a transitional phase, with a mix of old and new products. The market thus seems to prefer short-term futures close to due date and long-term forwards at the far end of the time horizon. The main reason for this preference is the different margin calls for futures and forward contracts. Financial settlement of futures includes daily mark-tomarket settlement, which requires a large amount of cash in pledged/non-pledged cash accounts, especially for the long period contracts at the far end of the time horizon. Financial settlement of forwards involves no daily mark-to-market settlement, and thus requires posting cash collateral only during the delivery period, starting at the contract s due date. Trade at Nord Pool s Financial Market 7
2.1. Futures Contracts Nord Pool lists for trading base load day and week futures contracts: Day contracts, Base load, ENODxxxx-xx Week contracts, Base load, ENOWxx-xx Period = 24 hours Period = 7 days The ENO prefix that has been added to the contract ticker codes indicates commodity and underlying market. E is for Electricity and NO for Nordic area. As of fall 2003, the week contracts have been listed with 8 consecutive contracts, in a continuous rolling cycle, as opposed to the current cycle that implies listing of weeks in groups of 4 after split of a block contract. Simultaneously, the block futures contracts have been replaced with forward month contracts. Settlement of futures contracts involves both a daily mark-to-market settlement and a final spot reference cash settlement, after the contract reaches its due date. Mark-to-market settlement covers gains or losses from day-to-day changes in the market price of each contract. Final settlement, which begins at maturity, covers the difference between Days 8-9 weeks Weeks the last closing price of the futures contract and the System Price in the delivery period. Trade at Nord Pool s Financial Market 8
Futures Contract Settlement Contract Price Trading Period Delivery Period Market price 285 288 Received during final settlement 260 270 275 270 System Price One hour Received during mark-to-market settlement Net procurement cost Procurement cost in the Spot Market Mark-to-Market Settlement Spot Ref. Cash Settlement Time +10 +5-5 +15 +3 In the illustration above, an Exchange Member/Clearing Member is assumed to have bought a futures contract at a price of NOK 260/MWh. During the trading period, from the date the contract was bought to the contract s due date, the market price for the contract increased to NOK 285/MWh. The price NOK 285/MWh is the final closing price prior to delivery. Daily mark-to-market settlement during the trading period credited the member a total gain of NOK 25/MWh (NOK 285-260). (The Exchange Member who sold the contract was debited NOK 25/MWh during the trading period). Throughout the final settlement period, which starts on the due date, the member is credited/debited an amount equal to the difference between the spot market price and the futures contract s final closing price. For the specific single hour indicated in the figure, the member has received NOK 25/MWh in daily mark-to-market settlement (during the contract s trading period) and a final settlement amount of NOK (288-285)/MWh = NOK 3/MWh for a total profit of NOK 28/MWh. If the Exchange Member/Clearing Member in the above example chose to procure the power from the spot market rather than cash in the profit, his procurement cost in the spot market for the specific hour is NOK 288/MWh. However, he has already received a profit of NOK 28/MWh in the futures market. The total cost, with hedging in the futures market and physical procurement in the spot market, is thus equal to the hedging price NOK 260/MWh. Trade at Nord Pool s Financial Market 9
2.2. Forward Contracts Nord Pool s forward contract structure is currently in a transition phase. The previous product structure lists base load for three seasons: Winter 1, Summer, Winter 2; and Year forward contracts: Winter 1 (FWV1xx) base load Season contract in year xx Period = 1 January - 30 April Summer (FWSOxx) base load Season contract in year xx Period = 1 May - 30 September Winter 2 (FWV2xx) base load Season contract in year xx Period = 1 October - 31 December Year xx (FWYRxx) base load Year contract for Year xx Period = 1 January 31 December Year contracts are split into season contracts, in accordance with product 1st year 2nd year 4th year specification rules. Seasons Forward season contracts are not subject to further Year splitting. The new product structure lists base load contracts for each calendar Month, Quarter and Year contracts: Month (ENOMmmm-yy) base load Month contract for calendar month mmm and year yy Quarter (ENOQx-yy) base load Quarter contract for quarter x (3 calendar months) and year yy Year (ENOYR-yy) base load Year contract for year yy Period = 1 January - 31 December Month contracts are listed on a 6 month continuous rolling basis, and are not subject to splitting. Quarter contracts will gradually replace seasons, and will first be listed in 2004. The season contracts currently listed will not be de-listed. Quarters are split into month contracts. Year contracts will be split into quarter contracts in accordance with product specification rules. Year contracts for 2006 and on will have the new ticker code above. In the trading period prior to the due date, there is no mark-to-market settlement. The markto-market amount is accumulated as daily loss or profit, but not realised, throughout the trading period. Trade at Nord Pool s Financial Market 10
Throughout the delivery period, starting at the due date, cash is required in the Exchange Member s / Clearing Member s pledged / non-pledged cash accounts, and settlement throughout the delivery period is carried out in the same way as for futures. The non-pledged cash account must be supported by a bank guarantee. 1st year Months 2nd year Quarters Year 4th y ear The example bellow illustrates the similarity between forwards and futures. The same data as that used in the example for futures is assumed. In the example, an Exchange Member/Clearing Member has purchased a forward at a price of NOK 260/MWh. At the due date, the value has increased to NOK 285/MWh. During final settlement for the hour specified in the figure, the member receives NOK (288-260)/MWh = NOK 28/MWh. This amount is the total of the accumulated value NOK (285-260)/MWh from the trading period (the pending settlement) and NOK (288-285)/MWh from the Spot Reference Cash Settlement. The pending settlement will be realised in the delivery period. Purchasing the contract s volume in the spot market costs NOK 288/MWh. The total cost of hedging the power purchase through a forward contract followed by a spot market purchase is equal to the hedging price, NOK 260/MWh. Forward Contract Settlement Contract Price Trading Period Delivery Period Market price 285 288 275 270 270 Pending Settlement 260 System Price One hour Received during final settlement Net procurement cost Procurement cost in the Spot Market Spot Ref. Cash Settlement Time +3 Trade at Nord Pool s Financial Market 11
2.3. Contracts for Difference (CfD) The reference price for forward and futures contracts is the Nord Pool Spot AS System Price. Actual physical-delivery purchase costs are determined by actual area prices. An area price differs from the System Price when there are constraints in the transmission grid; CfDs allow Exchange Members / Clearing Members to hedge against this area price risk. A perfect hedge using forward or futures instruments is possible only in situations when there is no transmission grid congestion in the market area, that is, area prices are equal to the System Price. In 2003 the area prices were only equal 27,5 % of the time. Hedging in forwards or futures therefore implies a basis risk equal to the difference between the area price at the member s physical location and the System Price. Contracts for Difference were introduced to provide the possibility for a perfect hedge even when the markets are split into one or more price areas. New forward contract types based on the area prices would have been another way to accomplish this goal. However, this method would have split the total liquidity among several products, and was rejected. A separate product, Contracts for Difference (CfD), was therefore introduced. To create a perfect hedge that includes the basis risk when area prices are not equal to the System Price, a three-step process using CfDs must be followed: 1. Hedge the required volume using forward contracts. 2. Hedge any price difference for the same period and volume through CfDs. 3. Accomplish physical procurement by trade in the spot market area of the member s location. Nord Pool ASA provides trading in CfDs for the following area price differentials: CfD name and reference area Norway Sweden Finland Denmark West Denmark East CfD definition P = Oslo area price minus System Price P = Stockholm area price minus System Price P = Helsinki area price minus System Price P = Aarhus area price minus System Price P = Copenhagen area price minus System Price Trade at Nord Pool s Financial Market 12
A CfD is a forward contract with reference to the difference between the Area Price and the Nord Pool Spot System Price. The market price of a CfD during the trading period reflects the market s prediction of the price difference during the delivery period. The market price of a CfD can be positive or negative or zero. CfDs trade at positive prices when the market expects a specific area price to be higher than the System Price, (that is, the selected market area is in a net import situation). CfDs will trade at negative prices if the market anticipates an area price below the System Price (the market area is in a net export situation). Contract for Differences Contract Price Trade Period Delivery Period 0 7 Market Price 13 10 9 16 20 Price difference Received during final Net CfD hedging costs Time Total price difference One randomly selected hour Final Settlement In this example, an Exchange Member/Clearing Member purchased a CfD at a price of NOK 7/MWh and no forward market hedge of the power volume was made. During the trading period, the market price of the CfD increased to NOK 16/MWh. For the randomly selected hour during the delivery period shown in the illustration, the member receives NOK (20-7)/MWh = NOK 13/MWh. Spot market purchase cost over the System Price for the specified hour is NOK 20/MWh. However, the member s net cost is equal to the hedging cost NOK 7/MWh. The next two examples illustrate a perfect hedge using CfDs and forward contracts. Here, the Exchange Member has carried out the two steps required to make a perfect hedge of area prices. He has purchased a forward contract (at a cost of NOK 260/MWh) to hedge the Nordic Power Exchange spot market price, and a CfD (at a cost of NOK 10/MWh) to hedge Spot Price<Are Price Procurement costs in Spot (290) Received during CfD settlement (5) Received during Forward settlement (15) Net procurement costs (270) 290 285 Spot Area Price System Price Forward + CfD hedging cost (260+10=270) Trade at Nord Pool s Financial Market 13
any area price differential. Total hedging costs are NOK 270/MWh. The financial results of using CfD hedging can be illustrated in a comparison of two delivery hours. In one case, the System Price is less than the area price, while in the second example the System Price is higher than the area price. In the chart above, the area price for the selected hour is NOK 290/MWh. The System Price is NOK 285/MWh. In the forward settlement during the delivery period, the member receives NOK 15/MWh, and in the CfD settlement, NOK 5/MWh. Net procurement cost is NOK 270, which equals the initial hedging costs of the forward, plus the CfD. In the chart above, the System Price for the selected hour is NOK 287/MWh. The area price is NOK 280/MWh. System Price > Area Price Spot Area Price System Price Forward + CfD hedging cost (260+10=270) 280 287 Paid in CfD settlement (7) Received in forward settlement (17) Net procurement costs (270) Procurement costs in Spot (280) In the forward settlement, during the delivery period, the member receives NOK 17/MWh, and in the CfD settlement he is charged NOK 7/MWh. Again, the net procurement cost is NOK 270, which equals the initial hedging costs of the forward and the CfD. 2.4. Option Contracts An option is a right to buy or sell an underlying contract at a predetermined price at a predefined date in the future. Options, combined with forwards and futures, offer valuable strategies for managing the risk associated with power trade. Option contracts to buy are termed call options, and option contracts to sell are termed put options. Thus, the holder of a call has the right to buy the underlying contract, and the holder of a put has the right to sell. Trade at Nord Pool s Financial Market 14
The option contracts at Nord Pool are European-style, i.e., they can only be exercised at the exercise date. The following definitions apply. Underlying contracts: These are season forward contracts (to change to quarter forward contracts) and year forward contracts. When an option series expires, new series are listed, in accordance with product specification rules. Exercise day: This is the day the right to buy/sell the underlying contract is executed. Exercise day is set as the third Thursday in the month before the delivery period of the underlying contract starts, as defined in the option s product specifications. The holder of an option can only exercise his right on exercise day. Exercise price: This is the predefined price, or strike, of the underlying contract. Nord Pool sets five strikes when an options series is initially listed for trade. Strikes are based on the closing prices of the underlying forwards. The spread intervals between the five strikes are defined in the option product specifications. New exercise prices are automatically generated when the traded price or the closing price of an underlying forward is at or below (above) the second lowest (highest) exercise price. The premium: The option premium is quoted in Norwegian kroner, NOK/MWh. The premium is settled the day after the option is traded. The size of an option contract is calculated by multiplying the number of MW by the number of hours in the underlying contract. Listing of new series: New option series are listed for trade on the first trading day after the exercise day of the previous contract series. Profit Profit Forward price Forward price Premium Premium Purchased Call Purchased Put Profit Profit Premium Forward price Premium Forward price Written C all Written Put Trade at Nord Pool s Financial Market 15
On the exercise day, options have four basic profit and loss curves. Potential profits and losses for each option strategy depend on the price of the underlying forward contracts, exercise prices, and the premium paid. In the case of a purchased option, the risk of loss is limited to the premium paid and the potential profit is unlimited. The contrary applies to written options; i.e. the risk of loss is unlimited while the potential profit is the premium received. A purchased call option can be compared to an insurance against increases in the forward price of power. A buyer can use call options to insure that his fixed price of future power will not exceed certain levels, while at the same time enjoying a fall in power prices should it occur. A purchased put option could be used by a producer to insure future sale of power. It could also be used to insure against volume risk, for example in a dry seasons, where high prices coincide with low volumes, causing a reduction in profits. A variety of options strategies are used for price hedging. Because of their flexibility, options are useful to both hedgers and traders. An Exchange Member seeking trading profit, rather than price hedging, might combine a put and a call in positions known as a straddle or a strangle, if prices are expected to move sharply up or down. An option can be described as in-the-money if it would result in a profit if exercised immediately (i.e., the underlying forward price is above (below) the strike price for a call (put) option). An option which would result in loss of premium is out of the money while it is at the money if the underlying forward price is equal to the strike price. The profitability of an in-themoney purchased call option is similar to the profit potential of holding a long position in the underlying instrument. Out-of-the-money puts or calls offer potential profits, if they move as anticipated past at-the-money value into an in-the-money position. 2.5 Electricity certificates 3 March 2004, Nord Pool initially launched a spot contract that is integrated with other financial products. Trading is done directly electronically or indirectly by phone on PowerClick. The product being launched is a spot product with physical delivery three days after the trading date. Quotations are in SEK and the contract will be referred to as Elcert (ticker code ECS). The minimum traded contract volume will be 100 Elcert. The market is open for trading five days a week between 10:00 a.m. and 2:00 p.m. The trading days for elcertificates follow Nord Pool s financial market. Trade at Nord Pool s Financial Market 16
3. Trading in Nord Pool s Financial Market Futures and forwards contracts, options, CfDs, and electricity certificates are traded continuously, as in other advanced commodity markets. Nord Pool operates an electronic trading system, PowerCLICK Exchange, where Exchange Members can trade in the following ways: Electronically by using PowerCLICK Trade application installed in the traders premises. This can either be connected via fixed telecom lines, or via a secure VPN channel over Internet. Via telephone to the financial desk at Nord Pool, where orders are placed in the trading system on behalf of the member Trading thorough telephone Fixed line VPN Internet PowerCLICK PowerCLICK Internet Financial desk PowerCLICK Exchange Electronic matching of trades Trade at Nord Pool s Financial Market 17
3.1. Daily routines The derivatives market opens is open between 8:00 and 15:30, Norwegian local time, and the electricity certificates market is open between 10:00 and 14:00. An Exchange Member s orders are binding until the end of the trading day, or until the member has changed or cancelled them and received a confirmation receipt. Once the market has closed for the day, written trade confirmations are made available for Exchange Members. For derivatives 17:30 is the deadline for Filing Complaints for Exchange Trades, and correspondingly 15:45 for electricity certificates. Closing prices for financial derivatives contracts, used for settlement and margin calculations, are determined at a random time within the last 10 minutes of the trading day. The precise time is selected by a random number generator to avoid any potential closing price manipulation. Nord Pool distributes closing prices to the market as soon as possible after the market closes at 15:30. The closing price of a financial derivatives contract is calculated as the last trading price if the traded price is within the buy and sell spread, or bid and offer price, at the randomly selected time. For contracts outside the spread, or contracts that have not been traded, the closing price is defined as the average of the bid and offer, as specified by the rulebook for the financial electricity market. 3.2. PowerCLICK Exchange trading system The heart of the electronic trading at the financial market at Nord Pool is the PowerCLICK Exchange trading system. It is a system for continuous electronic trading of power contracts. It is a high performance trading system, build to handle more than 1 000 deals and 10 000 orders pr minute. The PowerCLICK allows generators, distributors, consumers, and traders of electricity with an electronic connection to participate directly on the exchange. The system handles electricity Future, Forward, CfDs, Option contracts and electricity certificates. Trade at Nord Pool s Financial Market 18
3.2.1. PowerCLICK Trade application The PowerCLICK Trade is the front end application available to members of the exchange, and is an effective component of the PowerCLICK Exchange System. However members are also free to use third-party or internally developed trading applications. By using PowerCLICK Trade, market participants can quickly and simply display information, enter orders and execute trades. The PowerCLICK Trade is a powerful trading application that provides full order management and execution capabilities. The application has a Windows based format and is very easy to use, allowing users to: Post orders Change posted orders Cancel posted orders Trade on orders posted by other Exchange Members Price Ticker Handling mass order quotations Linking up the PowerCLICK to spreadsheets Through the electronic system, the Exchange Member always has access to updated locally available information. Examples of such information include: Best buy and sell price, as well as order depth Last traded price, as well as highest and lowest price distributed during the day The total volume behind the individual prices Intra day graphs displaying price and volume movements throughout the trading day. Overview of the orders posted to the market by the Exchange Member, and an overview of trade conducted by the Exchange Member during the trading day Exchange Members connected to the electronic trading system also have access to telephone trade if they, for example, wish to make an inquiry about a price or enter a combination trade. PowerCLICK Trade is continuously updated and enhanced to keep pace with the rapidly changing requirements of energy markets. Trade at Nord Pool s Financial Market 19
3.2.2 PowerCLICK Connectivity A fixed line connection to PowerCLICK is the fastest and most reliable way to connect to the Exchange. Using virtual private network (VPN) encryption technology, a secure link to the PowerCLICK Exchange can be established via the Internet. PowerCLICK s VPN link-up is an alternative to leased-line connection between Nordic Power Exchange members and Nord Pool. Key benefits of VPN connectivity are lower connection costs and reduced lead time to new PowerCLICK customers ability to trade. Connecting to a local ISP (Internet Service Provider) is cheaper than subscribing to a long-distance leased line; further, the wait for leased line installation is avoided. New PowerCLICK VPN accounts will normally be up and running, and ready to trade directly on the exchange, within one week after an application request. PowerCLICK accessed over Internet can either be used as the main connection or as a backup connection towards Nord Pool. Tests conducted by OM and Nord Pool have confirmed that a VPN PowerCLICK link is as fast as today s fixed-lines solution, even at high system loads. That said, Internet communications are subject to interruptions that are impossible to anticipate or diagnose, and throughput and response times cannot be guaranteed. 3.3. Trading via Telephone Exchange Members can place buy and sale orders by telephone to the financial desk, which then enters orders in the electronic trading system. The electronic trading system then posts them to the market. All orders placed in the market by an Exchange Member are binding until the end of the trading day or until the Exchange Member contacts the financial desk with an order cancellation or alteration. Exchange Members can obtain information about prices and order depth through the desk. If a trade is made on one or more of the Exchange Member s orders, the financial desk notifies the Exchange Member immediately to confirm the transaction. Exchange Members who trade by telephone will usually have access to market information from an online-based information system. These systems update the prices on the market in real time. The system displays information such as product series, best buy and sell prices on the market, last paid price, and accumulated volume for the current trading day. Some information distributors also offer historical data and tools for analysis. Trade at Nord Pool s Financial Market 20
Nord Pool s also provides market information for Exchange Members who don t require continuously updated data. The website (www.nordpool.com) provides updates on Financial Market prices every 15 minutes, which is accessible to the public. In addition, Exchange Members have free access to Nord Pool s ftp-server. This database includes historical physical and financial prices. 4. Trade Volume Development The traded volume at Nord Pool s financial market has increased considerably since the first products were launched in 1993. In analysing the evolution of volumes and market shares, it should be observed that since 1993 the products, trading systems, and market area have gone through many changes. The major changes include the following: Introduction of financial futures in 1994. Merger of Norway and Sweden into one common power market and implementation of an automatic trading system, PowerCLICK, in 1996. From 1996-2000 forward contracts, options, and Contracts for Difference (CfDs) were listed. Finland, Denmark West, and Denmark East joined the Nordic Power Exchange s market area during this period. The new Exchange Act was adopted by the Parliament November 17, 2000 and went into effect March 2002. The changes in the Securities Trading Act was adopted by the Parliament June 7, 2001. Nord Pool applied for exchange license in May 2001 and was approved March 2002. The Financial Market TWh 1200 1000 800 600 400 200 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 The license was taken into effect Monday March 18, 2002. New and updated Rulebook reflecting the changes in the market structure set in force March 1, 2002. The new market in Swedish electricity certificates was established 3 March 2004. Trade at Nord Pool s Financial Market 21
The total volume of financial contracts traded at Nord Pool s financial market in 2003 was 545 TWh. In 2003, the total volume of trades cleared by Nord Pool Clearing was 1743 TWh. This would give Nord Pool ASA a market share of approximately 31% of all cleared contracts. Total generation in the Nordic Power Exchange area is about 380 TWh per year. Accordingly, trade in financial contracts is about five time s physical load (not including non-cleared financial contracts). Trade at Nord Pool s Financial Market 22