One of the biggest stories in clearing and settlement last year was the impact on the European Climate Exchange (ECX) of ICE's decision to leave LCH.Clearnet and start up its own clearinghouse, effective July this year.
The decision sparked a row between ICE and LCH.Clearnet, during which LCH.Clearnet refused to let ICE list any new products for clearing, a decision that caused the delay of new environmental products like Certified Emission Reduction (CER) futures on ECX, because ECX outsources its exchange activity to ICE.
In the end, LCH.Clearnet relented — on the very day that all parties were to meet in court — and ECX launched its CER futures in March, followed by options in May.
CERs are issued by the UN group overseeing emissions trading under the Kyoto Protocol's market-based Clean Development Mechanism when the UN signs off on a clean development project, such as a wind farm or solar energy project, in the developing world. CERs are recognized as bona-fide carbon offsets in most cap-and-trade systems, and as such are the closest thing the rapidly-expanding environmental markets have to a global benchmark.
The Kyoto Protocol expires in 2012, and exchanges are proliferating around the world as different governments experiment with something to follow it. More than 10 exchanges already exist, and a shakeout is inevitable.
ECX expects to come out on top. It has long dominated the market for European Union Allowances (EUAs), which are the units that trade within Europe under the European Union Emissions Trading Scheme and now it's captured a nearly 90% market share in CERs.
At this writing, the bid-offer spread on December 2008 EUAs is just €0.01, with 28 contracts representing 28,000 tons of carbon emissions bid at €25.33 and 10 contracts (28,000 tons) offered at €25.34.
"When I joined in July last year, the bid-offer spread was €0.10 on a good day, and €0.15 to €0.20 on a bad day, with just one or two thousand contracts being offered on each side," says ECX boss Patrick Birley.
In April, the contract averaged about 9,000 contracts per day, or nine million tons. CERs have been trading for just over a month and are already doing over 1,000 contracts per day.
