Totem launches valuation system to help energy traders

Totem Market Valuations, the London-based valuation clearinghouse, has launched a new service for energy traders. Totem’s energy derivatives valuation service is designed to give traders in over-the-counter energy contracts a market price gleaned from a consensus among other energy traders.

Totem said the service is aimed at countering the lack of transparency in European OTC prices and increased pressure from accounting standards and shareholders. So far, the service offers consensus valuations in products such as Brent, natural gas, gas oil and heating oil. The company hopes to add electricity to its services by the end of August.

The first round of energy contract valuations were performed on May 31, at which point Totem had five companies taking part. But it is hoped that this number will grow soon. “We expect to see new customers from two different directions,” said Tom Charlesworth, Totem’s head of commodities valuations. “Firstly, there will be some who are using our service in different commodity areas, many of whom asked us about extending it to energy in the first place. The other side is one where we’ve not usually had a good set of contacts with – utilities and merchant companies.”

Targeting US merchant companies trading in Europe may seem a little strange to some at a time when traders like Dynegy and Aquila are significantly scaling-back their European operations. But Charlesworth claimed part of their problems could have been avoided if the Totem valuation system could have been employed: “I would say around half of the major players are US entrants. Naturally, with one or two pulling back, that does decrease the size of the pool, but one of the reasons they have done this is because they’ve had mark-to-market problems in the first place. This type of service is something that will show internal management and shareholders that they are using best practice risk management techniques.”

But some are sceptical of such a valuation service. Drew Stephens, chief operating officer of London-based energy broker Spectron, said great advances have been made in energy data in recent times. “There’s a good amount of data out there and I’m not sure that there’s anything new here,” he said.