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NZX unveils 'fundamental change' strategy, based on derivatives and clearing facilities:

Tuesday 9th March 2010

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NZX expects 50% of its future revenues to come from fees on clearing and settlement services and high margins obtainable from derivatives trading, according to a presentation by head of traded products, Fiona Mackenzie, to investors in Wellington today.

NZX released the presentation under continuous disclosure obligations.

The presentation declares an "expected" investment of around $10 million to establish clearing house facilities - described as "the core we never had" - that are essential to running a derivatives trading platform, and to create a "fundamental change to NZX Business," which is currently rooted in its traditional equities trade and lower-value data revenues.

Forecast revenue from clearing and settlement is estimated at $2.75 million to $3.5 million in year one, rising to $15 million over five years, driven in part by global participants in NZX's hottest property - dairy derivatives - being attracted to trade other NZX derivative products.

Mackenzie was appointed last May to prepare a strategy expanding NZX's product offering away from listed equities, which her presentation describes as "increasingly commoditised product, dominated by global electronic liquidity aggregators".

By comparison, "derivatives are high margin products, tend to be 'stickier', (and) drive connectivity decisions thus increasing value of NZX products", the presentation says.

Long term, the integration of NZX's information, markets, and infrastructure services would see 50% of revenue derived from clearing, settlement and derivatives margins, 40% from equity and derivative market membership and IT services, and a further 10% coming from market and subscription data and publications.

The presentation lays out a roadmap for new products, which includes the launch within two months of phase one electricity derivatives, "dependent on platform provider decision by existing electricity market participants".  The presentation does not say how or what clearing and settlement facilities would be provided by time of launch. 

Whole milk powder futures would launch in June, followed by skim milk and anhuydrous milk fat futures in September, along with a "phase 2" electricity derivatives launch.

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.

Over five years, the venture would be measured on whether it was achieving two to four times the volume of physical dairy market trading, or 12,000+ lots daily, electricity at 50% of the level of spot market trading (150 contracts daily), and the equivalent of an additiional 100,000 to 1.6 million shares traded daily as a result of single stock options.

The exchange would be looking for six or more derivatives trade participants, two or three of which should be from offshore; two or three general clearing participants, and two or three global independent order routers.

Demand for between 100 and 300 data terminals would be created in an area that has shown substantial reduction over the last two years.  New information products such as electricity indices and predictive agricultural productivity indices would also be developed.

The clearing and settlement question is pressing for NZX, which must have a solution by mid-year to remain credible as a bidder to run the government-ordered electricity derivatives market scheme, announced last December as part of reforms to the wholesale electricity market.

NZX and the Reserve Bank of New Zealand have been working since December on the potential for joint procurement of clearing and settlement facilities, and have issued no update on progress.

Shares of NZX last traded at $1.99 and have declined 11% in the past month.

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