01 February 2008 Features

 

Commodities on the up and up

Sherree DeCovny

A surge in commodities trading is matching a growth in planet-friendly instruments.

The credit default swaps and equity derivatives markets seem to be getting a lot of attention nowadays. Volumes are exploding, and the upside potential is enormous. Well, roll over guys and make room for your friends on the commodities desk because they’re not doing so badly either.

In the last year, the Reuters-CRB Continuous Commodity Index is up 28%. The Grains Index is up 61%, the Energy Index is up 51%, and the Spot Metals Index has risen 29%. No wonder the producer price index was up 6.3% year on year, the largest rise since 1981, and the consumer price index was up 4.1% year on year, growing at the fastest rate since 1990.

It’s also no surprise that trading volumes are through the roof, much of which is electronic. In 2007, electronically traded CBOT agricultural futures and options on futures averaged 326,324 contracts a day, up 350% from 2006. Nymex energy and metals volume on the CME Globex platform tripled from 2006 to 2007 to average 757,000 contracts per day.

The CME Group recently announced it completed the migration of the e-cbot futures and options on futures contracts onto its CME Globex electronic trading platform. All e-cbot listed equity index and agricultural products began trading electronically on CME Globex in mid-January. Customers can now trade agricultural and equity index products on one platform, with each product group having one set of rules and policies and standardised trading hours. They will also have access to improved risk management tools and faster, more timely market data for agricultural and equity index products that previously traded on e-cbot.

Considering all this activity, the CME Group plans to launch an upgrade to the CME Globex electronic trading platform in the first quarter of 2008, which will significantly reduce message response time. During testing, under a replay of peak market conditions, the upgraded CME Globex platform demonstrated over a 50% reduction in response time, from an average of 31 milliseconds down to about 16.5 milliseconds.

But getting back to those rising commodity indexes, corn prices have doubled since 2004. One reason for the surge is the amount of acreage that’s being devoted to ethanol production. Yes, the penny has finally dropped: the US needs to think seriously about climate change and energy independence.

Of course the folks in New York have figured out there’s money to be made on these efforts. In December Nymex announced the formation of the Green Exchange venture, with Evolution Markets, Morgan Stanley Capital Group, Credit Suisse, JPMorgan, Merrill Lynch, Tudor Investment, ICAP and Constellation Energy. The new exchange will offer a range of environmental futures, options, and swap contracts for markets focused on solutions to climate change, renewable energy and other environmental challenges.

The Green Exchange products are expected to begin trading during the first quarter of 2008. Products will be listed for trading on the CME Globex electronic trading platform and for clearing on the Nymex ClearPort platform.

Initially, the Green Exchange will offer trading in global carbon-based contracts, such as carbon allowances (EUAs) under the European Union Emissions Trading Scheme, carbon credits (CERs) under the UN Clean Development Mechanism, and verified greenhouse gas emission reductions (VERs/VCUs) used in accordance with voluntary carbon standards. The Green Exchange will also offer contracts for US SO₂ and NO_x emissions allowance trading programs, as well as contracts for national Green e-certified voluntary renewable energy certificates.

The Green Exchange venture also intends to offset all of its electricity use with Green e-certified renewable energy credits. It also plans to offset its remaining non-power related carbon emissions through the purchase of voluntary carbon credits, making the exchange fully carbon neutral.

Interestingly, we are starting to see green initiatives in other parts of banking. In November 2007, Nacha, the electronic payments association, announced the formation of the Pay It Green Alliance, which is focused on educating consumers and businesses about the positive environmental impact of choosing electronic bills, statements and payments over paper.

A 2007 survey by Javelin Strategy and Research revealed that if all US households received and paid their bills electronically, the country would save 16.5 million trees each year, or the amount of lumber needed for 216,054 typical single-family homes; reduce toxic air pollutants by 3.9 billion tons of carbon dioxide equivalents, akin to taking 355,015 cars off the road; and reduce by 1.6 billion pounds the solid waste generated in a year, equal to 56,000 fully loaded garbage trucks.

…and now that leaves us something to think about other than our rising food and energy bills.