ICE continues European drive, holds off on European weather

Atlanta-based Intercontinental Exchange (ICE), last month expanded its presence in the European energy markets. On May 23 it launched over-the-counter (OTC) trading in UK, German and French power markets, and it expects to add OTC trading in European coal by the middle of this month. ICE also plans to extend its clearing services to the OTC UK natural gas and European power markets. But although the exchange is considering offering European weather contracts, it has put a hold on launching the business.

Stephanie Trabia, chief executive of ICE’s London office, says the introduction of these contracts follows a successful period of ICE expansion in Europe, which has seen the London office expand to a team of 15 from just two when ICE was established eighteen months ago.

“This is part of our strategy to offer multiple products trading on a single screen,” Trabia says. “We launched UK natural gas trading last December and have seen steady growth since. More than 25 firms now trade regularly in the UK, with daily OTC volumes averaging 140 million therms in April and a one-day record of 256 million therms was set on May 13.”

The addition of the European coal contracts follows the launch of three US coal contracts on ICE in April. And the exchange claims to have already captured more than 30% of the OTC coal derivatives volume traded in the US.

ICE also intends to extend its clearing facility to include the UK natural gas and power markets and the German power markets. The clearing of OTC gas and power markets in both North America and Europe through a single global clearing house, the London Clearing House (LCH), allows ICE clients to eliminate counterparty risk – an increasingly important benefit since Enron’s collapse. ICE already offers a clearing service for US oil swaps and US gas swaps.

Trabia also says ICE is considering introducing power contracts for the Swiss and Dutch markets. “At the moment we are simply responding to customer demand.”

As for ICE’s European weather derivatives plans, the exchange recently held meetings with US energy firm Aquila to discuss the possibility of entering the European weather risk market. Although Trabia intends to hold more meetings with weather risk participants, to gauge customer demand for the product, she says ICE is currently too busy with its other European commitments to consider launching a weather contract. And the same applies to emissions trading, which like weather, is currently traded on the ICE screen in the US, but not Europe.

Although ICE claims to have had success with its US weather contracts, which were developed under Aquila’s guidance, European exchanges have failed to create interest in exchange-traded weather derivatives. The London International Financial Futures and Options Exchange (Liffe), which launched its weather futures contract in December 2001, has only traded one contract of five lots on the Liffe London indexes. The contract was traded with Aquila, but Liffe’s Paris and Berlin contracts have still not been traded.

Euronext, the pan-European cash and derivatives exchange, is also planning to launch exchange-traded weather derivatives and has been producing French weather indexes since January this year.

Last year, Eurex, the Swiss-German derivatives exchange, started publishing temperature indexes for 30 European cities as a prelude to entering the exchange-traded weather derivatives market. But it soon discarded the plans.