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Traders See ICE/NGX Cleared Deals as Offering Efficiency, Liquidity

A little more than a month after the alliance between Atlanta-based IntercontinentalExchange (ICE) and Calgary-based Natural Gas Exchange Inc. (NGX) began offering clearing and settlement services for physical over-the-counter (OTC) natural gas contracts at certain western market points, the response from the industry has been favorable.

The first two natural gas hubs available for cleared physical delivery were the PG&E citygate and GTN Malin on March 3 (see NGI, March 3), with the Henry Hub added on April 7 (see NGI, March 31). Additional U.S. hubs are likely to be announced in the near future, according to the alliance. NGX's clearing organization serves as the central counterparty for financial performance while guaranteeing physical delivery. At GasMart 2008 in Chicago, May 20-22, ICE will be on hand in the Market Network Center to demonstrate the new cleared function.

David Goone, ICE senior vice president for business development and sales, told NGI recently that the roll-out of the product is being well received. "We started taking some of our markets and adding the option of the NGX clearing solution. While it is still in early days, well over 20 firms are now signed up and we are going around with NGX to actively educate people in the U.S. because it is not clearing in the traditional futures sense. NGX is the counterparty to every trade and there are a lot of netting benefits from the delivery process. It makes the delivery process a lot simpler and easier for commercial players.

"This product has been very well received and we are starting to see some decent activity at Malin and PG&E, as well as at Henry. We had record volume at the Henry Hub on Thursday [April 17]," he added. "Interest continues to grow as people who have signed up continue to test it out and get comfortable with the system. We are already getting requests for the addition of other market points and we are working with NGX on trying to prioritize and meet that market demand. People are definitely dipping their toes into the water."

Goone noted that this introduction is not too dissimilar from when ICE started clearing in its financial gas markets. "It begins with lots of people interested and trying to understand it, but once they get involved, we expect that the growth will be more and more rapid," he said. "The pipeline is full in terms of people in the process of signing up and using the product. We're right on target and are very pleased with it."

Looking ahead, Goone said more market points are in the works for the cleared treatment. Two factors will drive what points are released next. "Customer demand is key. We try and go where our customers want us to go. The second factor is the ability of NGX to schedule at the new hub and understand the risks involved. Those are the two important determinants."

One western utility trader said the new offering has been widely accepted. "We are seeing little difference between the cleared and bilateral pricing," the trader said. "We like it a lot because it gives us a lot more options with the clearing because more trading counterparties are easily available. We are seeing more activity earlier in the day because of the clearing."

The trader added that a previous working relationship with both ICE and NGX was also helpful. "We've been working with NGX for a long time already, so we welcomed their participation in the new service. I really think the new product is increasing liquidity, which obviously is a good thing for the market."

One of the initial concerns some within the industry had was whether the cleared product was trading at a premium to the bilateral product because of its seemingly more "firm" nature. The trader said he has seen no such pricing difference, adding that he doesn't "see any premium for firm cleared pricing."

The March 2007 agreement to form an alliance was viewed as a "win-win" for both companies. The agreement gave NGX, which has a robust Canadian physical trading and clearing business, entry into the United States. The cleared and bilateral markets for North American physical gas and Canadian electricity operated by NGX and ICE are offered together on ICE's electronic platform. In turn, NGX serves as the clearinghouse for these products. The move complements the clearing ICE offers in its OTC markets for financial contracts. NGX also uses the ICEBlock system to electronically accept for clearing off-exchange transactions in financial gas and other energy products.

Atlanta-based ICE "pioneered the concept" of OTC clearing for financially settled natural gas and power contracts in 2002. NGX has been clearing physical natural gas contracts at Canadian hubs since 1994. The physical clearing on select U.S. trading hubs is available as part of the previously announced alliance between ICE and NGX (see NGI, April 2, 2007).

A Northwest utility trader told NGI that the reduced credit concern really alleviates some of the risk inherent in the buying and selling process. "The difference between these products and the products currently offered by ICE is that these are cleared by NGX, meaning there is no bilateral credit concerns," he said. "By comparison, the rest of the products offered on the ICE platform are bilateral, meaning they rely on letters of credit that exist between the two parties. In this model, ICE is just the broker to the trade."

Commenting on the new offering at the Henry Hub, a Houston-based trader said that while there were not many people offering a cleared product so far, "the option is still pretty new at this point and we'll probably see a substantial market develop in cleared." He added that you "usually see bilateral and cleared altogether," noting that "if you have a lot of white on the screen, it means good counterparty credit." He said you can click an option that gives cleared product only and you can see who is offering it.

"I can't see any significant difference in cleared and bilateral prices, but you might see some cleared product premium in certain situations like a hurricane," he said. "There is nothing bad about the new option that we can see."

During GasMart 2008, ICE will have a workshop on electronic trading and host the main GasMart reception. The conference will be in the Sheraton Chicago Hotel & Towers. More than half of the 450 already preregistered to attend are utility, LDC, IPP and industrial purchasers of natural gas. Go to gasmart.com for more information, a list of attendees and to register.

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