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Energy, Commodities and the Internet, Part 2

Coming off a record-setting year, momentum continues to build at the Intercontinental Exchange (ICE) as it moves into 2007. As detailed in Part 1 of this two-part series, the ICE has become a leader and successful innovator in the field of exchange-based energy and commodities trading.

The Atlanta-based exchange last year carried out a series of significant technology upgrades and re-engineering projects in the process reducing “round-trip” transaction times more than 85 percent to less than 30 milliseconds.

The exchange is looking to continue building on a successful string of new energy futures, options and OTC (over-the-counter) derivatives contracts that it launched in the past year, including contracts for WTI (West Texas Intermediate) crude oil.

Now it is expanding into the soft, agricultural and commodities markets through its merger with the New York Board of Trade (NYBoT).

The ICE intends to continue establishing and expanding its role as a leading exchange for Internet-based trading of CO2 and greenhouse gas emissions reduction allowances, a market it pioneered along with the Chicago Climate Exchange’s European Climate Exchange subsidiary.

The NYBoT Merger

Expanding further into the commodities markets, management and staff at the ICE and NYBoT are busy endeavoring to make the merger work.

The ICE-NYBoT combination brings together the two exchanges’ complementary line of derivatives contracts — soft, agricultural commodities for NYBoT and energy commodities for ICE.

It also brings electronic, Internet-based trading to the exchange floor-driven trading heretofore used at NYBoT.

“This marks a historic and important step for NYBoT, its customers and its membership that has been many months in the making,” said NYBoT chairman Fred W. Schoenhut.

“We take pride in being able to offer our global customer base increased access to our exchange. We believe the addition of electronic trading alongside our robust trading floor will ensure NYBoT remains a leader in soft commodities. We appreciate the support of the NYBoT customer community and look forward to bringing out our slate of currency and index products in the near future to continue to enhance our service offering to customers,” he stated.

Prime movers in the ICE-NYBoT merger: access to a greater, more detailed amount of market information; higher levels of trading and operational efficiency; greater liquidity; and lower costs offered by ICE’s electronic transaction and information technology.

“We are working closely with management and staff at NYBoT to facilitate a smooth integration across all areas of the exchange. In terms of trading platform, we have recently announced NYBoT’s intention to introduce electronic trading for the first time in the exchange’s history. It will take place exclusively on the ICE platform, beginning January 19 for NYBoT soft commodities,” Mark Woodward, the ICE’s regulatory and compliance and emissions projects manager, told the E-Commerce Times.

On January 8, the NYBoT began offering screen-based training sessions for exchange members, including both wireless and wired access from its trading floor. Administrators at the respective exchanges are coordinating members’ enrollment for direct network access to ICE’s WebICE front-end application.

In order to provide an additional lift to trading activity at the combined exchange, most of the independent system vendors that have developed front-end applications linking to the ICE trading platform are expected to provide access to NYBoT products.

New Contracts, New Markets

Soft commodities are not the only area in which the ICE is applying its business and technological acumen.

It appears that markets for CO2 and greenhouse gas emissions reduction credits is an idea whose time has come, and the ICE has been at the leading edge of developing a centralized marketplace for the origination and trading of CO2 and greenhouse gas reduction emission allowances.

A growing range of commercial, government and nonprofit organizations are signing up for memberships on the ICE, as well as SENDECO2, a member of the European Climex Alliance, the Chicago Climate Exchange and the European Climate Exchange.

While its Carbon Financial Instrument (CFI) futures and options contracts have proved very successful and paved the way for growing issuance and trading of emissions reduction credits and allowances, the development and trading of energy commodity contracts have been ICE’s forte.

“We take great pride in our innovations and unwavering attention to meeting our customers’ needs. We introduced the all-electronic, financially settled ICE WTI Crude Futures contract last February after significant research,” the ICE’s Woodward elaborated.

WTI is the leading benchmark for crude oil prices in the United States, while Brent Crude is the leading benchmark for pricing crude oil and refined products produced and consumed outside of the U.S.

ICE now offers futures and options contracts on both via its trading platform.

“We knew that our customers wanted the ability to trade the contract electronically and on the same platform as our benchmark Brent Crude futures contract, to take advantage of spreading opportunities. We also believe that market participants are increasingly relying on the ICE Brent Crude contract for their hedging and risk management activities, as evidenced by steadily growing trading volumes,” said Woodward.

The ICE has also been successful in the more complicated, less standardized area of OTC derivative products trading.

The exchange last year introduced more than 50 new cleared OTC contracts, bringing the total number of cleared OTC contracts available on the ICE platform to over 80.

Cleared OTC volume rose 131.2 percent to a new record last year as a result, Woodward recounted.

Learn As You Go

The ICE, in concert with Chicago Climate Exchange subsidiary the European Climate Exchange, in April 2005 launched the first — and what have become the leading — exchange-traded futures contracts based on emission allowances issued under the European Union’s (EU) Emissions Trading Scheme (ETS).

Addressing the learning through experience that is currently taking place in the first emissions reduction allowance markets, such as the EU’s ETS, Michael Liebreich, CEO of New Energy Finance, said, “At present, the carbon prices are below what is really needed to make substantial changes to our energy consumption patterns in the developed world. Where there has been a very substantial impact is in the developing world.

“The CDM system [Kyoto Protocol’s Clean Development Mechanism] has been effective in providing a large proportion of the funds required to reduce the production of HFC (hydrofluorocarbon) and methane from waste, two very powerful greenhouse gases,” Liebreich continued.

“Having dealt with this ‘low-hanging fruit,’ however, it is becoming more expensive to generate a CDM credit. So long as the allocations in Europe become tighter during Phase II and beyond, prices for carbon should become more meaningful and start to bite in Europe.

“The risk is that if this causes Europe to become uncompetitive and costs jobs, then Europe’s resolve on climate change might waver. What we need is for the same costs to be borne by the U.S., and to address the vast growth in emissions from China, India and the rest of the world, as well as from Russia, whose emissions will be growing rapidly as it spends its growing wealth,” he noted.

The Bottom Line

The ICE’s success has helped pave the way for other emissions reduction allowance exchanges, including Barcelona’s SENDECO2.

“We exist because of the EU ETS scheme. We provide a secure, transparent and safe environment so that affected EU ETS companies can commercially interact as to satisfy their buying and selling CO2 emissions needs,” SENDECO2’s director general, Javier Tordable Parcerisa, told the E-Commerce Times.

“With only two years of experience, the EU ETS has tripled and reached the trading figure of 817 million allowances traded with a 14.6 billion euros (US$18.8 billion) value. As the end of the first EU ETS period nears, we can only expect to increase this by a factor of three at the least,” he added.

Energy, Commodities and the Internet, Part 1

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