Asian energy markets are changing faster than most firms can keep pace with. New venues, expanding product ranges, evolving regulation, and an increasingly interconnected global market are reshaping how trading desks operate across the region
We spoke with Erlend Engelstad, Head of Commercial at EEX in Asia, to get his perspective on what’s driving growth, where the pressure points are for trading desks, and what firms expanding into Asian markets need to get right.
EEX's business in Asia has grown significantly in recent years. What has been driving your activity in the region?
EEX first came to Asia through the acquisition of Cleartrade Exchange, a technology and market provider based in Singapore. Since then, EEX Group has pursued a hub-and-spoke strategy which places our core markets at a central venue in Europe, with customers connecting directly to a single exchange interface, to ease complexity and optimise capital use. The rise of clearing to mitigate counterparty risk has dramatically increased the appeal of anonymous electronic execution, replacing bespoke and manual transaction flows.
EEX’ primary tailwinds for growth in Asia have been the changing nature of energy markets themselves. Historically, energy markets in our region focused on oil, natural gas and intermediary products such as fuels and feedstock. In the past couple of decades, the financialization of the electricity complex has significantly grown in importance – the best examples being the Australian power market and the rapid development of the Japanese power derivatives market over the past six years.
EEX has also greatly benefited by the improved mobility of capital, most evident in the growth of hedge funds and proprietary trading firms establishing a presence in the region.
What's driving the expansion of electronic trading in Asian energy markets compared to 5 years ago?
The fast-moving integration and increased sophistication of global energy markets is prompting the need for advanced and low latency electronic trading solutions. State-of-the-art electronic facilities offered by exchanges such as EEX not only improve speed and market transparency, but also provide a straightforward way to satisfy the increasingly complex regulatory compliance requirements faced in energy trading. EEX already offers connectivity across the vast space of execution modes and latency requirements, from systems receiving and clearing OTC bilateral and brokered trade submissions, through standard central limit orderbook access (CLOB) deployed directly or via a multitude of independent service vendors (ISVs), all the way to highly sophisticated low-latency solutions like co-location with our matching engines in Germany.
Catering to the increased sophistication in our trading communities is high on the priority list, especially when considering the lightning speed evolution and prevalence of algorithmic and high frequency trading. EEX has already been working on addressing the anticipated future needs that could arise on our European and North American markets, which will undoubtedly benefit our Asian market participants as well.
Where do you see the main growth opportunities for EEX over the next three to five years?
We see a number of opportunities for EEX in the short term, where some of the major catalysts include the continued liberalization of final energy markets, growing electrification, the integration of intermittent power sources, and expanding data centre deployment, all of which introduce new risks and volatility across the whole energy value chain. Offering a comprehensive portfolio that addresses our customers’ requirements both across geography as well as industry verticals themselves is vital to the continued growth of EEX, and Asia will be a cornerstone component of the medium-term strategy. With 25 years of experience on the European markets, EEX is well-positioned to leverage its expertise and adapt to the evolving requirements in global energy markets.
What do you hear most often from trading desks about their operational pain points when trading Asian energy markets?
The most evident challenge in our industry is ensuring liquidity and trade assurance across different time zones. This is further complicated by payment and settlement cycles, which have large impacts on intermediaries like banks who may have their own local operational cycles. A general trend is for markets to extend operating hours to capture round-the-clock pricing, which has to be balanced against concerns of diluting liquidity windows. Whereas in the past, you could ringfence local or regional markets, today’s energy market looks much different, where the price of Dutch natural gas may impact the day-ahead price in Japanese electricity. This also puts high demands on trading desks, who will need to integrate their books across increasingly global shifts, to avoid being stuck with spread or liquidity risks occurring at the wrong time of day.
Uniform market access and a global view of your trading book becomes indispensable in an increasingly interconnected market.
In terms of data integration, a frequently mentioned point is harmonisation of trade capture as well as market and settlement data. Achieving a comprehensive view of total exposures aggregated from multiple trading venues is clearly something a lot of our customers contend with.
What should firms consider when connecting to multiple Asian energy venues? Especially firms expanding from Europe or North America
Market access is getting easier by the day, as banks and other intermediaries are competing for attractive end customers and market friction is slowly whittled away by more diverse trading interest. At the same time, pre- and post-trade services are becoming more complex, as is assessing regulatory implications of trading in certain markets. Familiarizing yourself with the local market and ensuring that you have appropriate licenses in place are paramount to a smooth expansion.
In EEX’ core markets such as electricity trading, regulation is the name of the game, both from a financial and operational point of view.
From a financial regulation perspective, this is still largely multifurcated across Asia Pacific, in contrast to the central regulation provided in for example, the EU, which centralises rules and reporting across the continent. Operationally, regulation is also significantly local and tailored to government policy targets such as energy security and affordability. At its essence, energy markets are largely built and maintained at the intersection between regulators and commercial marketplaces such as EEX. Therefore, navigating and ensuring compliance with local regulations in Asia is key to a successful market entry.
Find out more about EEX in Asia https://www.eexasia.com/
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