Editor’s Letter – April 2012

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April 30, 2012

The main news of the month is the CME’s acquisition of GreenX. CME had already owned a share of the “green exchange”; however, with this move, CME bought out its partners in GreenX, including Constellation Energy, Credit Suisse, Evolution Markets, Goldman Sachs, ICAP Energy, J.P. Ventures Energy Corporation, Morgan Stanley, RNK Capital, Spectron, TFS Energy, Tudor Investment Corporation and Vitol SA. GreenX has been dealing emission reduction products developed for Europe (European Union Allowances or EUAs), UN Certified Emissions Reduction Units (CERs), US Regional Greenhouse Gas Initiative carbon allowances (RGGI), US emissions allowances (SO2 and NOx), Californian Carbon Allowances (CCAs), and Cross-State Air Pollution Rule (CSAPR) Contracts. GreenX is considered to be the second largest carbon exchange in the world, following the Chicago Climate Exchange, operated by Intercontinental Exchange. Two rivals, CME and ICE, continue their quest for market dominance.

Other news, which was rather disappointing to some market participants, was the CFTC rejection of the Nadex’s application for political event derivatives tied to outcomes of the 2012 presidential race and whether the Democrats or Republicans will control the U.S. House of Representatives and Senate. Setting aside arguments about whether such contracts are of a purely speculative nature, the trades of similar contracts will continue in international venues, but not on U.S. exchanges. Contracts on the U.S. presidential election are being traded on Intrade, an Ireland-based exchange that offers a wide set of bets on political events in UK, US, France and Mexico.

An interesting set of products was introduced by the Nodal Exchange and LCH.Clearnet. New power contracts incorporate only charges for energy plus congestion, which effectively eliminates a loss component from the total price, LMP. This new derivative allows market participants to assess a critical element of the PJM market, congestion, which can and quite frequently has a significant impact on the total LMP.

Other updates and news are not as sensational. CME continues to launch more derivatives built on Brent crude. This time these are Brent-DME Oman spreads. CME also introduced products for Western Canadian oil as the importance of the Alberta crude is growing on the international markets.

Environmental products sustained their popularity with exchanges and data providers last month. Renewable compliance markets are now covered by Platts through several assessments developed specifically for RECs in California, Connecticut, Maryland, Massachusetts, New Jersey, Ohio, Pennsylvania, and Texas, as well as assessments for solar markets and voluntary markets. A new trading platform designed for the New Zealand carbon compliance market was launched by OM Financial. GreenX, despite a change of ownership, does not lose its focus and continues to develop new products; this time, new products were ERU futures and options. In addition, Bangladesh, Canada, Ghana, Mexico, Sweden and the United States launched a new global initiative to fight global climate change. How it is going to differ from all other global initiatives and programs, and whether it is something to rival the Kyoto Protocol by Canada and the US, is yet to be discovered.

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