FCA ARTICLE 30 Workshop September 12 th 2017 By Energinet and Svenska kraftnät Presentation from workshop including notes 1
WHO ARE WE? Nanna Foller Larsen, Energinet • Randi Kristiansen, Energinet • Jenny Lagerquist, Svenska kraftnät • Christina Simón, Svenska kraftnät • Who are you? • 2
TODAY’S AGENDA 10:40 - 11:10 Introduction to the day 11:10 - 12:00 Introduction to subject 12:00 - 13:00 Lunch 13:00 - 13.30 Brainstorm in groups 13:30 - 14:00 Qualify Ideas in groups 14:00 - 14:30 Coffee break 14:30 - 15:00 Plenum discussion and wrap up 3
PURPOSE OF TODAY Involvement of the market participants in the work • Get inspiration from the market participants on the work • Get opinion on preliminary work done by TSO’s • Follow the premise of the Ei and DERA ruling • • Be as creative as possible 4
11:10 - 12:00 INTRODUCTION TO SUBJECT - Ruling from Ei and DERA - Purpose of actions from TSOs - Introduction to the work of the TSOs 5
RULING FROM EI AND DERA FCA article 30 – coordinated decision to not issue LTRs on DK1-SE3 and DK2-SE4 • Liquidity in DK1 and DK2 was found insufficient • The decision was based on an assessment by the NRAs • Energinet and Svenska kraftnät has the task of supporting the financial markets according to the • ruling above Proposal has to be delivered to the NRAs on November 17 th • The investigation is currently concentrated on investigating ”other measures” for supporting the • financial markets 6
THE TASK For whom is the TSO supporting the financial markets? The task is to support the financial markets • Transmission rights between DK and SE is not to be issued • The purpose is to support hedging interests • Solutions that reduces liquidity premiums for hedging products can be considered • The solution has to be cost efficient • The cost of the solution will be compared to the gain of the market participants with hedging • interests 7
SUPPORT MARKET MAKERS TSO define market maker criteria • Smaller spreads • Larger market maker amounts • TSO contribute to the payment towards the market maker known cost • DK areas already have market makers • Tender would possibly mean that market makers could be on other exchanges split liquidity • Doubt about the amount of bids into a tender state aid? • 8
SUPPORT MARKET MAKERS Preliminary Pros and Cons Pro ros Co Cons ns Possibility of reduction of spreads Market maker already exists Possibility of trading larger volumes at the same Unclear if supporting existing market maker time increases liquidity Known cost when setup is in place Possible procurement procedure needed TSO have no additional financial obligations or costs Possibility of splitting liquidity via procurement procedure No added resources when setup is in place Risk of state aid 9
NOTES ON SUPPORT MARKET MAKER Conditions regarding the tender: Can the TSOs ask companies instead of an exchange? • Depend on the cost of the tender whether TSOs can state Nasdaq should be the exchange. Conditions/terms are not present today to ensure volume and low spreads. Volume should be the result of tight spreads. • Is that not just a question of costs? This is where TSOs could help with the costs. Sure that the MM solution would work for the market. How would the TSOs evaluate if the target has been reached? • Not clear to TSOs, evaluations has to be done on the way. NRAs will do an evaluation every four years. Market maker will ensure that the whole curve is served (3 years, 1 week,…) Market maker is a natural way of supporting the market. It also • solves the timing issue, you can trade when you want. If especially the spread is lowered the liquidity should be increased. • FCA is about improving the hedging possibilities – do not focus on one product. Think outside the box. • Think that there would be more companies willing to become market makers. • Need to have production to be Market marker. History shows something else. Maybe it is a question of money. Several companies could be interested in becoming a market maker if the market maker contract would be split into smaller volumes – to • enable smaller market participants to be a market maker. Idea to do this for a test period. • 10
NOTES ON SUPPORT MARKET MAKER Conditions regarding the tender: Can the TSOs ask companies instead of an exchange? • Depend on the cost of the tender whether TSOs can state Nasdaq should be the exchange. Conditions/terms are not present today to ensure volume and low spreads. Volume should be the result of tight spreads. • Is that not just a question of costs? This is where TSOs could help with the costs. Sure that the MM solution would work for the market. How would the TSOs evaluate if the target has been reached? • Not clear to TSOs, evaluations has to be done on the way. NRAs will do an evaluation every four years. Market maker will ensure that the whole curve is served (3 years, 1 week,…) Market maker is a natural way of supporting the market. It also solves the • timing issue, you can trade when you want. If especially the spread is lowered the liquidity should be increased. • FCA is about improving the hedging possibilities – do not focus on one product. Think outside the box. • Think that there would be more companies willing to become market makers. • Need to have production to be Market marker. History shows something else. Maybe it is a question of money. Several companies could be interested in becoming a market maker if the market maker contract would be split into smaller volumes – to enable • smaller market participants to be a market maker. Idea to do this for a test period. • 11
AUCTION EPADS TSO organise auctions on EPADs with a suitable (monthly/yearly/weekly/daily) frequency and suitable • amount Any thought on suitable frequency? • Products to auction – the same as for LTTRs or should quarter be considered due to trading pattern? • Auction could be done multiple places: JAO, Exchange (Nasdaq or similar) or at the TSO – place would • depend on social economic welfare considerations Any preferences in terms of JAO, Nasdaq or TSO to preform auction? • New business area for the TSO • Not currently a business area at Energinet • Selling DK2 EPADs • DK1 possibly buy EPADs • Could buy/sell depend on time of year? E.g. Q1/Q4 have more sales interest in DK1 EPADs? • 12
AUCTION EPADS Preliminary Pros and Cons Pro ros Co Cons ns Ensured liquidity TSOs obtain financial positions Congestion rents somewhat hedge EPADs MIFID II and EMIR regulation can be imposed Clearing via exchanges removes counterparty risk Doubt about the legality of using congestion rents to cover EPAD trading Unknown cost Possible need of Chinese walls to separate trading activity from other TSO activities Possible loss of confidence in TSOs neutrality Possible concentration of liquidity around auctions Auction setup has to be developed by either TSO or exchange/platform Possible split of liquidity between auction and exchanges New resources needed to handle daily operations 13
NOTES ON AUCTION EPADS (1/2) • Venue for auction should have a secondary market. No problem in selling at Nasdaq after the EPAD auction. Place of auction: • No problem with JAO, but a big concern with losing confidence in the TSOs when the TSO auctions financial products. • EPAD rules should be kept, full firmness. No force majeure as with the LTTRs. No EU-rule for EPAD – we have HAR for LTTRs. Auction a fixed volume in advance gives problem on possible underselling of the EPADs. What if you set a floor-price? • Is it ok that the TSOs have an opinion on the EPAD price? Floor-price needs to be changed all the time. Need to relate to the market. Problems with the TSO setting a floor price and thereby value a fair price = opinions on price in the market that the TSOs shouldn’t have an opinion on. If the TSO is transparent and base the floor price on the closing price or similar there is a risk for manipulation of the closing price. 14
NOTES ON AUCTION EPADS (2/2) Risk of split in liquidity between auction and the continuous market. • Only works in the carbon market because this is already liquid. Combos would attract speculators more that single EPAD auction. The risk is bigger in the EPAD auction. • Not always the case. VPP auction stimulated the trading in the EPAD market at the time of the auction. • VPP gave a lot of liquidity but VPP was hourly. Auction on monthly/yearly would not increase the liquidity in the market beside the day before/after the auction. VPP created liquidity because the VPP was a different product – call option. Auction is not a good idea- especially in relation to the trust in the TSO. What about a option on the underlying? • Options are very flexible which is good, but they are very sophisticated – not an option for the hedgers. Risk that if TSOs intervene a lot, and set max-min prices, TSOs would effect the market. Prices can be disturbed by the auctions. • That is a risk and something that the TSOs need to handle. Transparency vs. not to disturb the market. 15
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