Traders Flee Nasdaq Power Market for Better Deals With Banks

05/07/2017 11:38 AST

Since the 1990s, Norwegian metals refiner Elkem AS routinely tapped the world’s oldest power exchange in search of the best deals on the electricity supplies it needed to run five plants that make materials for everything from iPhones to body armor to solar panels. Not anymore.

Elkem, Norway’s third-largest electricity buyer, has joined a growing list of energy players to quit the Nasdaq Inc. exchange that offers power contracts in the Nordic region and Germany. Trading on the Oslo-based market plunged 25 percent in the first half of 2017 to the lowest in at least a decade. Companies now buy directly from power plants or brokers and banks.

Once a model for how wholesale electricity was bought and sold in Europe, the 21-year-old exchange has lost at least 16 Nordic companies, including nine utilities and factories since 2014. Participants say trading became too expensive and cumbersome with new rules imposed to avoid another financial crisis. And with power prices low across Europe, there’s less incentive to use the exchange’s contracts to hedge risk.

“Exactly what we feared would happen, has happened,” Jens Nordberg, the head of financial trading at Swedish municipal utility Goteborg Energi AB who also sits on the board of a lobby group of regional electricity dealers.

It’s not hard to see why participants are quitting the exchange, which is called Nasdaq Commodities. Last year, the European Union imposed a wide-ranging overhaul of markets designed to reduce risk. The new rules included a ban on the use of bank guarantees as collateral for Nordic power trades, eliminating the financing tool that accounted for about 60 percent of the transactions handled by the exchange.

Nasdaq also changed the range of its contracts. Forward agreements that allowed for payments to be made at a future date when the electricity is delivered were replaced by standardized futures contracts, which require daily settlement.

The new contracts and the loss of a major financing tool mean market participants need to tie up more cash to guarantee their trades and renegotiate lending agreements, according to Goteborg Energi’s Nordberg.

As the tightened regulation forced some Nordic players to leave., other members have benefited. Some trading companies and financial firms are earning more from clients that choose not to deal directly with the exchange.

“Our clearing business has increased a lot after market participants were no longer allowed to use bank guarantees,” said Niclas Egmar, head of commodity trading at Swedish bank Skandinaviska Enskilda Banken AB.

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