FOA project picks Nasdaq OMX and Nord Pool

The long-running Futures and Options Association (FOA) UK power market design project, aimed at boosting liquidity in the UK's forward power market, has chosen Nasdaq OMX Commodities and Nord Pool Spot to deliver a platform for trading and clearing electricity spot and cash-settled derivatives.

The FOA's search for candidates has been hit by repeated set-backs since it first invited providers of clearing and market infrastructure to apply in mid-2007. APX, Nord Pool and European futures and options exchange Eurex were eventually shortlisted. "We've had some changes in partnerships along the way, with a substantial amount of re-reviewing going on," says FOA chairman Anthony Belchambers.

Nasdaq and Nord Pool plan to establish the platform in the second quarter of 2009 from a London-based office. It will be a 24-hour market with immediate clearing and notification capabilities. Existing members at Nord Pool and Nasdaq OMX Commodities will be exempt from paying any extra fees for the UK market.

Once the platform is open for business, the next challenge will be to achieve high levels of liquidity, says Belchambers. "We can dig the hole and fill it with water, but we can't force people to come and drink from it. However, we can offer it to those who are hot and thirsty," says Belchambers.

Paul Beynon, vice-president of UK power trading at RWE, says creating liquidity should not be a problem, as traders on the National Balancing Point gas hub have already said they will transfer liquidity on to the new exchange. "A single entity with low cost and few barriers to entry should centralise liquidity, and liquidity encourages more liquidity," he says. "It should be an attractive facility for all traders, with no requirement for bilateral credit arrangements."

One risk to liquidity, though, could be the APX UK power auction, set to go live on December 2. APX said in a statement that its auction methodology is consistent with the wishes of the FOA and that it is willing to provide the auction's index to other derivatives exchanges.

"APX launching its new auction will create healthy competition in the power market," says Belchambers.

Beynon recognises that the APX auction could damage the Nasdaq OMX and Nord Pool platform's prospects. "The APX auction is a risk to the process, as it could divide liquidity," he says. "But it is competition, and you have to welcome competition. It gives you the right products and incentivises the right fee structure," he says.