Exchange of the year: Nodal Exchange

The date October 19, 2016 marked one full year since Nodal Exchange transitioned its clearing services from LCH to its own vertically integrated clearing house, Nodal Clear – and what a year it was.

Activity on the exchange surged with traded volumes increasing by 97% during the year, compared with an industry average of 14%. This strength has continued into 2017 as traded volumes remained 79% higher year-on-year in January and February.

“Nodal Exchange went through a major transition, and perhaps that gave traders more confidence [to use the exchange],” says Paul Cusenza, the firm’s chairman and chief executive. “It could also be due to our expected shortfall risk model, which is extremely risk-protective and capital-efficient.” Cusenza is referring both to Nodal’s newly integrated clearing house and the resulting move to use expected shortfall over traditional margin calculation tools such as value-at-risk or standard portfolio analysis. He compares it to using a scalpel rather than a blunt wooden sword. On the strength of these developments Nodal clinched the ‘Clearing house innovation of the year’ award in the 2017 Risk awards.

The model was also praised by Nodal Exchange users interviewed by Energy Risk during the judging process, who called it “innovative”. Traders also mentioned the benefits arising from the range of contracts offered by the exchange. It currently provides more than 1,000 contracts on hundreds of unique locations or nodes across the US power markets, enabling traders to manage basis risk more efficiently.

Cusenza adds that the clearing house integration has already enabled the exchange to become more nimble in terms of expanding its product offering. In addition to launching a new futures contract for Mid-Columbia power trading in 2016, the exchange started working on plans to offer options contracts on power and gas later in 2017. According to Cusenza, this will round out the exchange’s offering, attracting new traders but also encouraging users to move more of their activities to the exchange due to the cross-margining benefits. “There are huge benefits from a capital-efficiency standpoint to concentrate all business on Nodal Exchange, and this allows traders to do that,” he says.