The UK doesn’t want ICE to have Trayport. The LSE/Deutsche Boerse deal looks dead in the water. But in one neck of the exchange woods — power — all parties appear happy.
Last Friday, the energy exchange EEX (part of the Deutsche Boerse empire) agreed to buy the U.S. based Nodal Exchange in an all-share deal, instantly turning the franchise global.
“What’s perfect about this acquisition in some respects is that we do very much similar things — they serve the power markets in Europe and we serve the power markets in the United States — and yet we don’t compete at all,” said Nodal’s CEO Paul Cusenza. “So the fact that we have another entity that we can learn from and try to optimize what we do and yet we’re not competitive, it’s a rare thing.”
EEX could be catching Nodal at a good time, as volumes in 2016 grew 97 percent in its electricity segment. Nodal now lays claim to some 28 percent of all U.S. open interest in power futures. And Nodal was an independent market before this deal.
Integral to Nodal’s rapid growth of late was the decision to start its own clearing house in 2015. LCH Clearnet was an early partner and provided clearing for Nodal, but the exchange wanted more control. When Nodal created Nodal Clear, it opted to use expected shortfall methodology as opposed to value-at-risk (VaR) which was used by LCH. That means Nodal is a vertically siloed futures exchange with a market-specific methodology to deal with power’s more idiosyncratic risks. The approach to portfolio margining has been an award-winning endeavor thus far.
Having its own clearing house also makes it easier for Nodal to develop new products. The biggest development on the horizon is options, coming in the second quarter. Cusenza hopes options will bolster the exchange’s successful contracts and help grow those without much traction yet, specifically natural gas, a commodity that EEX has experience with. In the realm of gas contracts Nodal now begins to bump up against the established derivatives markets.
What remains to be seen is how EEX and Nodal will operate as a duo. Will there be an opportunity for customers of one to access the other? Could there be alluring offsets or clearing efficiencies?
Whatever the case, Cusenza says that if they see a chance to leverage their infrastructure and address a customer’s need, they will.