MEFF launches central clearing for electricity derivatives

Increased liquidity in the Spanish market necessitates netting and reduction of counterparty risk, says managing director

The Spanish electronic exchange, Meff (Mercado Español de Futuros Financieros),  began centrally clearing over-the-counter electricity derivatives today (March 21).

The contracts will be settled and managed on Meff's existing central counterparty (CCP) through a new energy segment called Meff Power.

The move comes after several years of swift expansion in Spain's electricity derivatives market, with traded volume in 2010 approximately three times that of 2008.

"As in any other type of market, CCPs make sense in electricity when the markets start being liquid," says Fernando Centelles, managing director of Meff. "You need netting and you need to get rid of counterparty risk, and you need to be sure you can access any counterparty."

Power market liberalisation in Spain, as in other parts of Europe, has created the need for hedging services, fuelling the growth of an electricity derivatives market. Earlier this year, for the first time, notional traded OTC derivatives equalled actual consumption in the Iberian peninsula. Meff's Centelles is looking ahead to further expansion, and compares Spain with more liquid electricity markets in northern Europe. "Nordpool, which is a regulated clearing house, is clearing 5.5 times more notional than the consumption there. So clearly we still have many things to do here," he said.

The prospect of increased liquidity facilitated by central clearing has drawn more participants into Spanish electricity. Brokers Icap Energy, Tullett Prebon and CIMD have agreed to broker for Meff Power, and GFI is expected to join soon.

Meff is wholly owned by Bolsas y Mercados Españoles (BME), the operator of all stock exchanges in Spain. Meff has cleared financial products for 21 years, including IBEX futures, options and repos, but today marks its first move into energy. It has built up ties in this area over the past few years through supplying risk management technology to Spanish utilities.