Largest Carbon Exchange Caught in Crossfire
Date: 17-Dec-07
Country: UK
Author: Michael Szabo and Chris Wills
In recent days some of the largest carbon credit brokers have come out in favour of two new challengers to the European Climate Exchange (ECX), which does around 80 percent of the exchange-based trade in carbon credits.
One of ECX's partners, its clearinghouse provider LCH.Clearnet, intends to become its rival in early 2008.
"It's like an axe hanging over our head," said a source at the ECX, which is owned by AIM-listed Climate Exchange.
ECX has been caught in the battle between its two exchange partners, trading platform provider IntercontinentalExchange and clearinghouse LCH.Clearnet (Clearnet).
"ICE and Clearnet are bullying each other and we are caught in between. Things are at a standstill," said the ECX source.
It has already delayed the launch of a key futures contract for U.N-approved credits that brokers are eagerly anticipating.
Clearnet has refused to help ECX launch the contract because ICE wants to terminate its contract in July, 2008, as it is setting up its own clearing house, ICE Clear Europe.
The dispute is heating up just as ECX announced 1 billion tonnes of carbon emissions had been traded on it so far this year, with a total value of 17.6 billion euros (US$25.6 billion) in a total market expected to be worth US$70 billion this year.
TWO-THIRDS OF ECX TRADE
ECX's dominant position in the European Union Allowance (EUA) market is under threat; brokers say clients favour the transparency and price stability that comes with over-the-counter (broker to broker) EUA trading versus exchange-based transactions.
In 2007, over-the-counter (OTC) transactions have accounted for nearly two-thirds of all ECX's traded volume.
Last week, brokers including CantorCO2e and Spectron backed Clearnet to break away from ECX and set up its own OTC service.
Other brokers, including Evolution Markets and ICAP, are supporting a new US-based "Green Exchange", being launched by NYMEX in early 2008, that will offer both exchange-traded and OTC clearing services.
Clearnet said last week it will go it alone because ICE -- the trading platform supplier for ECX -- wants to terminate its contract from July, 2008, as ICE plans to set up its own clearinghouse, ICE Clear Europe.
"If Clearnet run off with the open interest they will be taking a large chunk of our volume away," the ECX source said.
The fight hinges on where clearing members will take the open interest -- the total number of unsettled contracts -- after July, when Clearnet's contract expires.
"The worry for ECX is that this could potentially threaten their business model," said James Emanuel of brokers CantorCO2e.
However, Emanuel thinks ECX will survive as it will still see substantial trading volumes, even if OTC liquidity moves to Clearnet or companies move emissions trading to rival exchanges like Nord Pool or the Green Exchange, which offer clearing for both OTC and exchange-based transactions.
CERS ARE KEY
The market is eagerly awaiting the launch of UN-approved certified emissions reduction (CER) credits on ECX, which has been delayed since September by the dispute.
There is still no firm date for its launch, though ECX maintains it will be in 2008.
CERs, which currently price below European Union credits, can be used by companies to meet pollution compliance targets from 2008 under the EU's emissions trading scheme and the Kyoto Protocol.
Clearnet is refusing to launch new products with ICE. This has so far scuppered ECX's attempt to launch CER contracts.
"The CER is something we're still trying to get Clearnet to launch," said Neil Eckert, chief executive of Climate Exchange.
"They actually have a duty to launch it as our clearing service provider so we're in talks with them about when it will happen. We're working hard to try and persuade them," he said.
A Clearnet spokesman refused to comment on ongoing negotiations between the two co
