NZX unveils "fundamental change" strategy
NZX unveils "fundamental change" strategy, based on derivatives and clearing facilities
by Pattrick Smellie
March 9 (BusinessWire) - NZX Ltd. 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.
(BusinessWire) 15:01:20