ANALYSIS: ICE surges in German power options after expiry tweaks

ANALYSIS: ICE surges in German power options after expiry tweaks

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Coordinating options expiries in its energy markets have provided impetus for Intercontinental Exchange’s ambition to grow market share in European power, according to a senior executive.

Speaking to FOW after the firm set in May an open interest record of nearly 80,000 lots in German power options, ICE’s senior director for utility markets said ICE has also seen German power futures total volumes also ticking up to over 105,300 lots in the second quarter. That translates to a record average daily volume of 2,100 lots.  

“German power options have been a new area of growth, where we have been able to become the venue of choice for that market,” Wouter de Klein said in an interview. “Key to this options growth is the runway we created by making important changes to market structure for futures and options across our utility market portfolio which removed operational and capital friction for customers.”

That growth has been driven by changes it has made to expiries and margin treatment, according to de Klein.

“We took energy products that had evolved in silos and changed the underlying structure to better support their correlation to each other by aligning settlement times across the portfolio and introducing early expiry in options,” he added. “We also made a significant change to our options portfolio by moving to futures style margining to improve margin efficiencies.

“Regardless of our market positioning in each instance our lead in market structure design was then followed by other market operators; being an early market mover to make these changes has really helped our customers maximise cross-contract benefits and we're seeing that fruit come to bear.”

Rival European Energy Exchange (EEX), which estimated its German power futures market share at 83% in May, has seen cleared futures grow 10% in June, to 659 TerraWatt Hours (TWh) in June, according to figures published by the exchange. By contrast the German venue has not traded any power options this year, according to monthly volume reports.

For ICE, its expansion in European power has been party driven by the strength of its energy complex. June volume in natural gas, which includes its benchmark Dutch Title Transfer Facility (TTF) future, rose 41% last month to 1.7 million contracts a day. Its environmental product suite, including its EU Allowances (EUA) emissions contract, increased 47% on the same basis to 88,000 lots in ADV, according to monthly volume disclosures.

“A lot of firms that trade German power with us are already trading benchmark contracts such as TTF, Brent, coal and EUAs,” de Klein said. “These contracts are highly correlated with each other, and that is why a diverse range of participants have become more interested in trading them all on one platform. The centralised clearing for those asset classes through ICE also brings margin and collateral benefits through offsets for firms with a diversified portfolio across these markets.”

In ICE TTF, well over 80% of the volume is executed on the screen, with 79% of all traded volume in European gas being TTF, according to the exchange’s own estimates. ICE German Power has seen over 60% of volume executed on screen in the year so far.

“We have invested in the build-out of our EU power markets over a number of years, and the tightening bid/offer spreads and growing screen liquidity reflect this investment,” de Klein said. “In addition to increased screen quoting and trading of outright futures contracts, trading activity has also grown due a structural increase in locational spreads quoting and trading, as well OTC cleared blocks.

“This is further evidenced by new firms now quoting and trading on a daily basis. In German power futures, we see trading activity across the curve with open interest out to December 2028.”

ICE last month saw trading volumes rise by 30%, partly due to the strength of the group's energy markets.

Speaking to FOW last month, the president of ICE Futures Europe said its Brent options contract had become the leading crude option product in the world.

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