Brokered EU Carbon Trade Plunges as Banks Scale Back

Carbon trading via brokers including ICAP Plc and GFI Group Inc. plunged to its lowest since at least January 2011 as banks scaled back buying and selling amid tighter regulation and a record glut of permits.

The volume of EU allowances handled by six members of the London Energy Brokers’ Association dropped 61 percent in July to 84.1 million metric tons from a year earlier, according to an Aug. 8 report by the lobby group. Trading in Certified Emission Reductions, the United Nations-regulated offsets, plunged 81 percent. Activity on ICE Futures Europe in London, the biggest exchange for carbon contracts, slid 19 percent in the month.

“A significant factor is that a few key players have exited,” Ilesh Patel, a partner in London at Baringa Partners LLP, said Aug. 9 by phone. “Banks need more money to trade carbon, power and other commodities because of new financial regulations that require them to set more risk capital aside.”

Banks are reducing trading in the 61 billion-euro ($81 billion) emissions market as the European Commission in Brussels struggles to deal with the oversupply. JPMorgan Chase & Co. and Bank of America Corp. have shut commodity trading units because of tighter regulation in Europe and the U.S. after the global recession.

Morgan Stanley will exit power and natural-gas trading in Bulgaria, the Czech Republic and Poland as it scales back involvement in commodities, a person with knowledge of the matter said in June. Louis Redshaw, Barclays Plc’s head of carbon, coal and iron ore trading, resigned from the London-based bank in April.

Bank Pressure

Pressures on banks to curtail commodities businesses include stiffening capital rules, and a regulatory crackdown on trading practices. Commodities revenue at the 10 largest firms slid 24 percent in 2012, according to analytics company Coalition Development Ltd. in London.

The European Parliament on July 3 approved a proposal to temporarily cut supply of carbon permits, after they slumped to a record 2.46 euros a metric ton on April 17 on ICE. The EU built up a record surplus of allowances and credits of about 1.8 billion tons during the five years through 2012, or 18 percent of total emissions in the region, according to Bloomberg New Energy Finance.

There’s been little incentive for investors to speculate about the outcome of the plan after the vote amid the dearth of policy developments, Trevor Sikorski, a London-based analyst in London for Energy Aspects Ltd., said Aug. 12 by phone.

EU carbon for December has rebounded 75 percent since reaching its record.

Rebounding Market

The market is indicating that EU nations will support the commission’s market-rescue plan, said Sikorski, who was formerly head of carbon research at Barclays in London.

If nations approve the proposal, “there will be more interest in trading,” he said.

Monthly broker volumes for EU carbon contracts have been volatile this year, LEBA data show. They dropped to 93.9 million tons in May after reaching a record 311.8 million tons in April. They recovered to 254.5 million tons in June.

Of the four top months for brokers since January 2012, three occurred this year, according to a data e-mailed by LEBA. It shows that the “EU allowance market is very liquid and volumes are higher, not lower,” Harriet Leatherbarrow, a spokeswoman for the group in London, said yesterday by e-mail.

Brokers Dominated

When the market started in 2005, much of the volume was handled by brokers, Leatherbarrow said. “Over time, much of the volume has migrated to the ICE exchange.”

Serra Balls, a spokeswoman for ICAP in London, and Armel Leslie, spokeswoman in New York for GFI,didn’t immediately comment on the drop in volumes when reached by e-mail.

Coal trading jumped 69 percent in July, according to LEBA. Demand for the fuel isn’t enough to boost trading activity much beyond compliance buying of carbon permits, Baringa’s Patel said.

LEBA members operating in European gas, power, coal and emissions are Evolution Markets Ltd., GFI, ICAP, Marex Spectron Group Ltd., Tradition Financial Services Ltd. and Tullett Prebon Plc., the industry group said.

Πηγή: Bloomberg Businessweek