Exchanges and clearing houses have a special place in the trading space given how they interface with a multitude of trading outfits on a daily basis.
It's for this reason, their perspectives on market movements can be crucial in understanding up-and-coming trends.
With this, we got the chance to ask a few questions to upcoming ETOT speaker, Götz Dittrich, Chief Operating Officer at ECC about specific trends he's noticed as well as other thoughts on current evolutions in the sector.
You were recently appointed to be a part of the Management Board at ECC (congratulations!) could you let us know your top 3 market trends you think everyone needs to pay attention to Why?
The first trend would be the continued transition from OTC trading into a cleared trading route. Which means an increase of the cleared ratio in the overall market as well as the introduction of new clearing services in evolving markets. For example, there are various initiatives in South-Eastern Europe in terms of offering new derivatives based on established underlying spot markets – we recently launched financially settled power futures for Bulgaria, Serbia and Slovenia. A transition from OTC trading is visible for example in Italy where a market that was dominantly traded OTC is now mainly a cleared one.
"...collateral management, bilateral transactions and bilateral trading arrangements are getting more risk averse and require a collateralisation of the transactions."
Is this a regional issue then?
It’s a general development, however it is driven by risk management considerations so it may be linked to regions where risk and credit management are more in-scope than others. But as a general statement, collateral management, bilateral transactions and bilateral trading arrangements are getting more risk averse and require a collateralisation of the transactions. Thus, the question of efficiency drives this development.
Secondly, what we see is the move towards long-term cleared hedging offerings. This is driven by the introduction of renewable energy regimes across Europe and the increased use of Power Purchase Agreements (PPAs) for hedging purposes. PPA’s require the development of new risk-management methodology covering the long term aspects of such agreements on the one hand but also require reliable price references. We’ve seen recently increasing long-term hedges in the Spanish and Italian power market and an increase in demand in these products in Germany and France.
Finally, we see many technological developments on either side of clearing houses in light of intra-day power markets. There is a substantial increase in the number of transactions – so the efficiency in terms of integration of renewable energy across Europe results in an increase in transaction volumes which in turn triggers development in the respective infrastructure including risk management functionalities.
How are organisations such as ECC/EEX being forced to adapt in the current technological, business and cultural climate?
We see many buzzwords like “cloud services” – but also cost management and time to market is something which drives our business very much. ECC, as a regulated entity, is for instance together with our colleagues from Group Deutsche Börse engaged in discussions with regulators concerning the potential usage of cloud services based on compliant governance models. Here we experience positive signals and expect to access some benefits of cloud infrastructures for instance in terms of scalability and flexibility on a mid-term perspective. This goes hand in hand with the development of suitable IT security standards for the cloud.
"We see many buzzwords like “cloud services” – but also cost management and time to market is something which drives our business very much."
Another impact to us is the need for increased agility in terms of time to market that changes
our business role. The previously dominant waterfall-like methodologies in terms of project
management are more and more superseded by agile concepts.
Yet another impact stems from the importance of clearing houses to the overall financial industry. The topic of IT security is something which drives our own development and a substantial amount of effort is exerted to maintain the highest standards of IT security for us.
Given how digital the modern day clearing and exchange process is, is it still important to meet your market? If so, why in particular?
We as EEX Group strongly believe in a close link and strong connection with our clients which is a major success factor for us. Our approach is to be close to our clients with offices across Europe connected to local communities, taking their requirements into account and translating them into specific solutions for our customers. We believe that the majority of our client basis is still not the standard financial market participant but a special group of entities who need the markets for hedging purposes, with their underlying business still linked to a physical commodity. Of course, we have traders, market makers and funds from the financial industry as members, but the vast majority of our clients still belong to either the production or consumption of commodities and those clients require support and counterparties. For example, people in my team – at the operations of ECC – have a long-standing experience and used to work in the power and natural gas business before. Clients very much appreciate our level of experience and our commitment to the industry.
Götz takes part on the “exchanges and CCP” panel at ETOT – Register here