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Market News

 May 05, 2010
Battle of the carbon exchanges opens new front

 Just days after IntercontinentalExchange (ICE) announced it is to shell out £395m to acquire London-based Climate Exchange, arch rival CME Group stepped up its push into the European carbon market yesterday with the opening of a London office for its Green Exchange subsidiary.

The company said it has secured a team of industry veterans to run the new office, appointing Les Male, former commercial director at Anglo-Dutch energy exchange APX-ENDEX, as head of London operations, while also hiring former Point Carbon executive Henrik Hasselknippe as managing director of global product development, and poaching Henry Bakker from rival European Climate Exchange (ECX) to take up a role as director of communications.

A spokesman for Green Exchange told BusinessGreen.com that it was looking to bolster its presence in the fast-expanding European carbon market and provide a "European face" to its US-based carbon exchanges.

"Europe is where the action is in carbon trading," he said. "There is liquidity in the market and a lot of people have experience of both energy and carbon trading."

However, Green Exchange will face a stiff test if it is to wrest control of the European carbon market from the two dominant exchanges: Bluenext, which controls the bulk of the spot market, and Climate Exchange's ECX, which holds about 90 per cent of the futures market for European carbon allowances.

The spokesman for Green Exchange said carbon traders had signalled that they would welcome more competition for the dominant exchanges. He added that all trades on the exchange would also be financially guaranteed by CME's clearing house, removing counter-party risk.

But market insiders warned that the company could struggle to gain control of the market from the ECX, which is soon to be acquired by ICE.

"If you ask traders if they want more competition between exchanges, they will always say yes," observed one market insider. "But liquidity follows liquidity and in all commodity markets you tend to get one dominant exchange with just a small amount of competition around the edges to keep them honest. The ECX is all-powerful at the moment."

With Climate Exchange's Chicago Climate Futures Exchange also dominating carbon trading in America's Regional Greenhouse Gas Initiative cap-and-trade scheme, ICE looks set to secure control of much of the global carbon market when it completes its acquisition of the company later this year.

However, Alessandro Vitelli, director of strategy and intelligence at analyst IDEAcarbon, said it was "all still to play for" as to which exchange would dominate the US carbon market when and if a national cap-and-trade scheme is launched.

He also predicted that while Green Exchange had been late to market in Europe and faced an uphill struggle to challenge ECX, it could target a number of niche markets.

"They may be able to get some private investors and hedge funds to trade on the Green Exchange, but the compliance market is likely to stay with Bluenext and ECX," he said. "If they want to break into that market, they will need to get liquidity and poach some big players from ECX, but that is a big ask, particularly when margins are already wafer thin."

One market observer agreed that Green Exchange would have to specialise if it is to challenge the incumbent exchanges.

"One option may be to move fast and try to convince some member states to run auctions through the Green Exchange," he said. "That would give them a route into the market."

He also predicted that over time all the carbon exchanges would be consolidated, with ICE and CME Group ultimately battling it out for dominance of the market.