EEX Says German Power Trading Doubled on Credit Worry

By Jim Polson and Lars Paulsson

Oct. 6 (Bloomberg) -- European Energy Exchange AG's trading volumes doubled in the second half of last month amid a surge in demand for safer trading on regulated platforms after the bankruptcy of Lehman Brothers Holdings Inc.

Daily volume in the derivatives market rose as high as 10 terawatt-hours on some days, from an average 4 terawatt-hours after the Leipzig-based exchange suspended Lehman on Sept. 15, Chief Executive Officer Hans-Bernd Menzel said in an interview in New York on Oct. 3. The exchange's clearing house liquidated Lehman's positions within 24 hours, he said.

``We had a good month,'' Menzel said, whose exchange is combining its power business with France's Powernext SA. ``We have a liquid market and clearing houses are considered to be a safe haven.''

Traders opted for exchanges where settlement is guaranteed amid concern over counter-party risk after Lehman's suspension. More than three-quarters of the trading in Europe's eight- biggest power markets last year was done outside an organized exchange in the so-called over-the-counter market, according to consultants Prospex Research Ltd.

For all of September, power derivatives trading rose 35 percent to 107 terawatt-hours from a year earlier, EEX said today in an e-mailed statement. On Nord Pool ASA, Europe's biggest power exchange, financial power trading rose 32 percent in September from a year earlier.


Margin Requirements

The German securities regulator, BaFin, requires EEX's clearing house, which guarantees the settlement of trades, to hold margins of 2 billion euros ($2.72 billion) to 2.5 billion euros, Menzel said. This backs daily open interest of 30 billion euros to 40 billion euros, comparable to that required for the Frankfurt Stock Exchange, Menzel said.

The margins that Lehman had on the exchange were used to unwind the bank's position, Menzel said. ``The quality and security of exchange-like, supervised trading plus clearing settlement out of one central counterpart comes to the mind of people more than it did before.''

Menzel spoke after addressing a conference sponsored by Rosenblatt Securities Inc. in New York.

Utilities, trading companies, banks and hedge funds trade electricity contracts on platforms such as EEX and over the counter, through brokers or directly with each other. Financial institutions now account for 50 percent of volumes, Menzel said.

U.K. Market

EEX reduced trading fees by a third in January, the first cut in six years, to compete with brokers and exchanges with lower fees. The cuts helped EEX reach a goal of cleared volume that was half that of over-the-counter exchange, Menzel said.

``Exchange-traded volumes have increased and OTC volumes have slightly decreased,'' he said.

EEX is targeting the U.K. market where it plans to offer both electricity and natural-gas contracts. It expects to hear next month the results of a tender by the U.K. Futures & Options Association for a power market, Menzel said. EEX is among two short-listed companies. APX BV is the other.

Trading by London-based companies in continental Europe already accounts for a majority of EEX volume on some days, he said. ``They're not doing it so much because they want to be in German power, but because they want a liquid market with a lot of players,'' he said, adding that the next step is the U.S.

Goldman Sachs Group Inc's J. Aron & Co. became the first U.S. member of the exchange in 2004 after the U.S. Commodity Futures Trading Commission allowed U.S. companies to trade directly there, without setting up European subsidiaries.

Day-ahead trading on EEX rose 23 percent to 12.8 terawatt hours in September.

The exchange's volumes for trading in European Emission allowances more than doubled to more than 7 million permits in September from 2.6 million a year earlier.

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net;