Copyright 2011, The NASDAQ OMX Group, Inc. All rights reserved. Copyright 2010, The NASDAQ OMX Group, Inc. All rights reserved.

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1 Copyright 2011, The NASDAQ OMX Group, Inc. All rights reserved. KJELL ASSERLIND HEAD OF GLOBAL COMMODITY SOLUTIONS NOVEMBER 2011

2 Agenda Update on European Power Market Opportunities for Electricity Derivative Market in Singapore 2

3 Get to know us We invented electronic trading 40 years ago and are now the world s largest exchange company. Electronic trading is trusted and emulated by every electronic equities exchange in the world, making the world s capital markets move faster, more efficiently and more transparently. We power 1 in 10 of the world s securities transactions Our global platform can handle more than 1M messages/ second at sub-100 microsecond average speeds NASDAQ OMX trading technology is used to power more than 70 exchanges in 50 countries We own and operate 24 markets 3 clearing houses 5 central securities depositories NASDAQ OMX lists 3,600 global companies worth $5.4T in market cap representing diverse industries and many of the world s most well-known and innovative brands More than $350B is tied to our global indexes

4 Copyright 2011, The NASDAQ OMX Group, Inc. All rights reserved. EUROPEAN POWER MARKET

5 European Conceptual market design National/regional Power Market Organized and bilateral market Physical & Financial markets Hedging 1 day - years ahead - continuous trading - Market Operator DAM Intraday Marketequilibrium one day ahead - auction trade - hours ahead - cont. trade - Balancing Power Market National/ regional System Operation Real-Time Operation Futures Days Weeks Forwards Months Quarters Years CfDs Derivatives Clearing house Additional Services Security - Margins - Business reports Mark-to-Market, Risk Management Clearing of Bilateral Derivatives Balancing generation and consumption in realtime Services during the Real- Time-Operation: Controlling frequency and voltage etc. 5 5

6 European SPOT Market Trading Volumes, 2009 in TWh 6

7 European Forward Market Trading Volumes, 2009 in TWh 7

8 Total European Exchange trading and OTC Clearing Volumes

9 European Market Coupling Development 9 9

10 Future of Power Trading in Europe EU: All countries connected through market coupling by 2015 Export power to where it is needed d and prices are high Open cross-border pricing models (transparency) - Greater liquidity - Consumer choice - Production efficiencies - Lower barriers of entry - Aid government planning in new sources of energy Mandatory clearing Standardization and trading on organized exchanges/marketplaces 10

11 Copyright 2011, The NASDAQ OMX Group, Inc. All rights reserved. OPPORTUNITIES FOR ELECTRICITY DERIVATIVE MARKET IN SINGAPORE

12 Introduction to future markets The objective is to provide a structured mechanism to set an agreement for a future delivery of an asset at a pre-defined d price Future market provides risk management tools (a hedge market) to either secure revenue in advance (seller) or lock-in cost in advance (buyer) Product types: Future and forward - Both terms are used to adress the issue of hedging Future indicates a higher degree of sophistication - Organised exchange - Standardised index-based derivatives - Daily M2M providing the opportunity to close positions and settle future obligations before maturity 12

13 Concepts and market models Basis of Trade Physical Delivery Financial settlement Market set-up Bi-lateral Broker Organised exchange Platform Voice Electronic Clearing arrangements Bi-lateral Central counterparty clearing Participants Hedgers Speculators 13

14 Trade as % of Consumption Derivatives Market Phases in the Development Towards Maturity The six phases of commodity trading (conceptual picture) Derivatives Phase 1 Pre-trade Phase Phase 2 Build up phase Phase 3 Expansion phase Phase 4 Rapid Growth Phase Phase 5 Speculation Phase Phase 6 Mature Phase Spot 0 Dissagregation Standardisation of products Exchange traded OTC Bi-lateral Early adopters Prefered choice Speculators in place Maturity 14

15 Mature Commodity Trading (Phase 6) The Multiples For Electricity and Gas Trading Are Based Upon Multiples of underlying consumption 4000 % ,9 1,8 US Gas Aluminium Nickel German Nordic Power Power Power Potential 15

16 The purpose of a future market for electricity Support investment decisions Assesing investments in new facilities Support the supply security of the market Shortages can be anticipated and managed Trading Opportunities Allowing hedgers to connect with speculators Additional benefits Ability for seller to set revenue in advance Ability for buyer to lock-in costs in advance Providing tools for day to day risk management 16

17 Do we need power derivatives? Electricity price is correlated to price of the fuel Should market participants focus on oil and gas trading instead? Power derivatives will be a local market Gas and oil markets are international a markets Power Oil Gas FX Freight 17

18 How can this be implemented in Singapore? Daily Index from EMC as reference price A Derivative Exchange that offers Gas and Power Derivatives and the possibility to trade both at the same time ie. Spark Spreads The Exchange offers also Clearing services. All trades are done with one Center Counter Party (CCP). Potential for the volumes TWh ( 1 10 times the underlying consumption) 18

19 What are the benefits of getting it right? Consumers Remove price risks Lock in future supply costs Discover benchmark prices Producers Lock in of revenue stream Long-term planning Discover benchmark prices Investors Forward price aids valuation of assets Lock in of revenue streams Speculators Trading opportunities Structured transactions Multiple p commodity portfolios Regulator Increased transparency of forward curve Efficient market attracting capital Intermediaries Business opportunities Structured transactions Product innovation 19

20 Pre-conditions for an Efficient Energy Marketplace - Observations Clear vision by all stakeholders of the benefits of electricity market deregulation - Supportive and vigilant regulator is most critical Voluntary - Choices for the market participants Clear and well defined price discovery mechanism in spot market to gain confidence among traders for price reference of underlying - Minimize impact of grid and operational constraints on energy price reference to gain confidence among traders outside traditional energy sector, i.e. attract t financial i speculators Ensure transparency Information provision i Central counterparty clearing services to expand market reach and reduce risk and transaction costs 20

21 21 Thank you! Kjell Asserlind Head of Global Commodity Solutions Market Technology Copyright 2009, The NASDAQ OMX Group, Inc. All rights reserved. Direct: SE Stockholm, SWEDEN kjell.asserlind@nasdaqomx.com