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NZX's dairy derivative plans intact: Weldon

Friday 4th June 2010

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NZX's plans to launch dairy commodity derivatives in September are intact, despite today's knockback from the electricity industry, which made a surprise choice of the Australian exchange operator, ASX, to run the new electricity derivatives market.

"This doesn't affect dairy at all." NZX chief executive Mark Weldon told BusinessWire. "If anything, we can allocate more resource to dairy rather than spreading it across more products."

While disappointing for the creation of deeper capital markets in New Zealand, the decision by electricity generators to use the ASX represented only a marginal loss of potential trading for NZX.

"Electricity, from a number of perspectives...has been a nice to have, but not the driver," said Weldon. "This is not about NZX economics. Revenue would have been well under a million dollars.

"Why it's important from a signal perspective is that if everybody wants to build a broad, healthy capital market here and someone's commissioned one little room to be built, it would be better to connect that to the rest of the house."

NZX announced in March it would launch whole milk powder futures in June, followed by skim milk and anhydrous milk fat futures in September.
In 2011, plans include dairy futures options, single stock equity options for Telecom and Fletcher Building, equity index futures (NZX10 and 50), followed in 2012 by other agricultural derivatives, and gas and carbon derivative products. 

Weldon said NZX was also willing to "meet or beat" what ASX was offering.  The ASX service, run from a Sydney Futures Exchange platform was "old, legacy infrastructure" compared to the trading platform NZX has implemented with software provider CQG.

"What we've got is best in class, brand new, using SWIFT, and highly secure," said Weldon. "Customers are finding it easy to use."

NZX announced earlier this year it was spending around $10 million on the new system, and has more recently announced the involvement of one clearing participant, FC Stone, willing to back NZX's derivatives market play.

Asked whether NZX would need more than one clearing participant - an essential element to creating a trustworthy derivatives market - Weldon said he would want two to three clearing participants involved in New Zealand over the next three years, clearing on two or three different systems.

Would-be competitor electricity retailers welcomed the decision today by the electricity generators' EnergyHedge trading platform subsidiary, for its capacity to allow new, smaller players into the retail electricity market.

ASX said its smallest parcel size for trading would be 1 Megawatt, and that user consultations would be part of its market development plan.

Some 3000 Gigawatt hours of "uncommitted load" is to be offered to all-comers in the new market by June 1 next year to meet the requirements of electricity reforms announced last December by Energy Minister Gerry Brownlee.

The decision was "a major step forward" in creating a more competitive and liquid wholesale electricity market, said Brownlee, while side-stepping NZX's arguments about the lost opportunity for New Zealand capital markets that the decision represents.

Small retailers Pulse Utilities and Simply Energy welcomed the announcements, as did the Major Electricity Users Group.

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