Analysis of the Iberian Power Forward Price Formation

The price formation of the Iberian Energy Derivatives Market-the power futures market-starting in July 2006, is assessed until November 2011, through the evolution of the difference between forward and spot prices in the delivery period (“ex-post forward risk premium”) and the comparison with the forward generation costs from natural gas (“clean spark spread”). The premium tends to be positive in all existing mechanisms (futures, Over-the-Counter and auctions for catering part of the last resort supplies). Since year 2011, the values are smaller due to regulatorily recognized prices for coal power plants. The power futures are strongly correlated with European gas prices. The spreads built with prompt contracts tend also to be positive. The biggest ones are for the month contract, followed by the quarter contract and then by the year contract. Therefore, gas fired generation companies can maximize profits trading with contracts of shorter maturity.

Propuestas regulatorias para el diseño de un mercado ibérico a plazo eficiente de la energía = Regulatory proposals for the development of an efficient iberian energy forward market

El mercado ibérico de futuros de energía eléctrica gestionado por OMIP (“Operador do Mercado Ibérico de Energia, Pólo Português”, con sede en Lisboa), también conocido como el mercado ibérico de derivados de energía, comenzó a funcionar el 3 de julio de 2006. Se analiza la eficiencia de este mercado organizado, por lo que se estudia la precisión con la que sus precios de futuros predicen el precio de contado. En dicho mercado coexisten dos modos de negociación: el mercado continuo (modo por defecto) y la contratación mediante subasta. En la negociación en continuo, las órdenes anónimas de compra y de venta interactúan de manera inmediata e individual con órdenes contrarias, dando lugar a operaciones con un número indeterminado de precios para cada contrato. En la negociación a través de subasta, un precio único de equilibrio maximiza el volumen negociado, liquidándose todas las operaciones a ese precio. Adicionalmente, los miembros negociadores de OMIP pueden liquidar operaciones “Over-The-Counter” (OTC) a través de la cámara de compensación de OMIP (OMIClear). Las cinco mayores empresas españolas de distribución de energía eléctrica tenían la obligación de comprar electricidad hasta julio de 2009 en subastas en OMIP, para cubrir parte de sus suministros regulados. De igual manera, el suministrador de último recurso portugués mantuvo tal obligación hasta julio de 2010. Los precios de equilibrio de esas subastas no han resultado óptimos a efectos retributivos de tales suministros regulados dado que dichos precios tienden a situarse ligeramente sesgados al alza. La prima de riesgo ex-post, definida como la diferencia entre los precios a plazo y de contado en el periodo de entrega, se emplea para medir su eficiencia de precio. El mercado de contado, gestionado por OMIE (“Operador de Mercado Ibérico de la Energía”, conocido tradicionalmente como “OMEL”), tiene su sede en Madrid. Durante los dos primeros años del mercado de futuros, la prima de riesgo media tiende a resultar positiva, al igual que en otros mercados europeos de energía eléctrica y gas natural. En ese periodo, la prima de riesgo ex-post tiende a ser negativa en los mercados de petróleo y carbón. Los mercados de energía tienden a mostrar niveles limitados de eficiencia de mercado. La eficiencia de precio del mercado de futuros aumenta con el desarrollo de otros mecanismos coexistentes dentro del mercado ibérico de electricidad (conocido como “MIBEL”) –es decir, el mercado dominante OTC, las subastas de centrales virtuales de generación conocidas en España como Emisiones Primarias de Energía, y las subastas para cubrir parte de los suministros de último recurso conocidas en España como subastas CESUR– y con una mayor integración de los mercados regionales europeos de energía eléctrica. Se construye un modelo de regresión para analizar la evolución de los volúmenes negociados en el mercado continuo durante sus cuatro primeros años como una función de doce indicadores potenciales de liquidez. Los únicos indicadores significativos son los volúmenes negociados en las subastas obligatorias gestionadas por OMIP, los volúmenes negociados en el mercado OTC y los volúmenes OTC compensados por OMIClear. El número de creadores de mercado, la incorporación de agentes financieros y compañías de generación pertenecientes a grupos integrados con suministradores de último recurso, y los volúmenes OTC compensados por OMIClear muestran una fuerte correlación con los volúmenes negociados en el mercado continuo. La liquidez de OMIP está aún lejos de los niveles alcanzados por los mercados europeos más maduros (localizados en los países nórdicos (Nasdaq OMX Commodities) y Alemania (EEX)). El operador de mercado y su cámara de compensación podrían desarrollar acciones eficientes de marketing para atraer nuevos agentes activos en el mercado de contado (p.ej. industrias consumidoras intensivas de energía, suministradores, pequeños productores, compañías energéticas internacionales y empresas de energías renovables) y agentes financieros, captar volúmenes del opaco OTC, y mejorar el funcionamiento de los productos existentes aún no líquidos. Resultaría de gran utilidad para tales acciones un diálogo activo con todos los agentes (participantes en el mercado, operador de mercado de contado, y autoridades supervisoras). Durante sus primeros cinco años y medio, el mercado continuo presenta un crecimento de liquidez estable. Se mide el desempeño de sus funciones de cobertura mediante la ratio de posición neta obtenida al dividir la posición abierta final de un contrato de derivados mensual entre su volumen acumulado en la cámara de compensación. Los futuros carga base muestran la ratio más baja debido a su buena liquidez. Los futuros carga punta muestran una mayor ratio al producirse su menor liquidez a través de contadas subastas fijadas por regulación portuguesa. Las permutas carga base liquidadas en la cámara de compensación ubicada en Madrid –MEFF Power, activa desde el 21 de marzo de 2011– muestran inicialmente valores altos debido a bajos volúmenes registrados, dado que esta cámara se emplea principalmente para vencimientos pequeños (diario y semanal). Dicha ratio puede ser una poderosa herramienta de supervisión para los reguladores energéticos cuando accedan a todas las transacciones de derivados en virtud del Reglamento Europeo sobre Integridad y Transparencia de los Mercados de Energía (“REMIT”), en vigor desde el 28 de diciembre de 2011. La prima de riesgo ex-post tiende a ser positiva en todos los mecanismos (futuros en OMIP, mercado OTC y subastas CESUR) y disminuye debido a la curvas de aprendizaje y al efecto, desde el año 2011, del precio fijo para la retribución de la generación con carbón autóctono. Se realiza una comparativa con los costes a plazo de generación con gas natural (diferencial “clean spark spread”) obtenido como la diferencia entre el precio del futuro eléctrico y el coste a plazo de generación con ciclo combinado internalizando los costes de emisión de CO2. Los futuros eléctricos tienen una elevada correlación con los precios de gas europeos. Los diferenciales de contratos con vencimiento inmediato tienden a ser positivos. Los mayores diferenciales se dan para los contratos mensuales, seguidos de los trimestrales y anuales. Los generadores eléctricos con gas pueden maximizar beneficios con contratos de menor vencimiento. Los informes de monitorización por el operador de mercado que proporcionan transparencia post-operacional, el acceso a datos OTC por el regulador energético, y la valoración del riesgo regulatorio pueden contribuir a ganancias de eficiencia. Estas recomendaciones son también válidas para un potencial mercado ibérico de futuros de gas, una vez que el hub ibérico de gas –actualmente en fase de diseño, con reuniones mensuales de los agentes desde enero de 2013 en el grupo de trabajo liderado por el regulador energético español– esté operativo. El hub ibérico de gas proporcionará transparencia al atraer más agentes y mejorar la competencia, incrementando su eficiencia, dado que en el mercado OTC actual no se revela precio alguno de gas. ABSTRACT The Iberian Power Futures Market, managed by OMIP (“Operador do Mercado Ibérico de Energia, Pólo Português”, located in Lisbon), also known as the Iberian Energy Derivatives Market, started operations on 3 July 2006. The market efficiency, regarding how well the future price predicts the spot price, is analysed for this energy derivatives exchange. There are two trading modes coexisting within OMIP: the continuous market (default mode) and the call auction. In the continuous trading, anonymous buy and sell orders interact immediately and individually with opposite side orders, generating trades with an undetermined number of prices for each contract. In the call auction trading, a single price auction maximizes the traded volume, being all trades settled at the same price (equilibrium price). Additionally, OMIP trading members may settle Over-the-Counter (OTC) trades through OMIP clearing house (OMIClear). The five largest Spanish distribution companies have been obliged to purchase in auctions managed by OMIP until July 2009, in order to partly cover their portfolios of end users’ regulated supplies. Likewise, the Portuguese last resort supplier kept that obligation until July 2010. The auction equilibrium prices are not optimal for remuneration purposes of regulated supplies as such prices seem to be slightly upward biased. The ex-post forward risk premium, defined as the difference between the forward and spot prices in the delivery period, is used to measure its price efficiency. The spot market, managed by OMIE (Market Operator of the Iberian Energy Market, Spanish Pool, known traditionally as “OMEL”), is located in Madrid. During the first two years of the futures market, the average forward risk premium tends to be positive, as it occurs with other European power and natural gas markets. In that period, the ex-post forward risk premium tends to be negative in oil and coal markets. Energy markets tend to show limited levels of market efficiency. The price efficiency of the Iberian Power Futures Market improves with the market development of all the coexistent forward contracting mechanisms within the Iberian Electricity Market (known as “MIBEL”) – namely, the dominant OTC market, the Virtual Power Plant Auctions known in Spain as Energy Primary Emissions, and the auctions catering for part of the last resort supplies known in Spain as CESUR auctions – and with further integration of European Regional Electricity Markets. A regression model tracking the evolution of the traded volumes in the continuous market during its first four years is built as a function of twelve potential liquidity drivers. The only significant drivers are the traded volumes in OMIP compulsory auctions, the traded volumes in the OTC market, and the OTC cleared volumes by OMIClear. The amount of market makers, the enrolment of financial members and generation companies belonging to the integrated group of last resort suppliers, and the OTC cleared volume by OMIClear show strong correlation with the traded volumes in the continuous market. OMIP liquidity is still far from the levels reached by the most mature European markets (located in the Nordic countries (Nasdaq OMX Commodities) and Germany (EEX)). The market operator and its clearing house could develop efficient marketing actions to attract new entrants active in the spot market (e.g. energy intensive industries, suppliers, small producers, international energy companies and renewable generation companies) and financial agents as well as volumes from the opaque OTC market, and to improve the performance of existing illiquid products. An active dialogue with all the stakeholders (market participants, spot market operator, and supervisory authorities) will help to implement such actions. During its firs five and a half years, the continuous market shows steady liquidity growth. The hedging performance is measured through a net position ratio obtained from the final open interest of a month derivatives contract divided by its accumulated cleared volume. The base load futures in the Iberian energy derivatives exchange show the lowest ratios due to good liquidity. The peak futures show bigger ratios as their reduced liquidity is produced by auctions fixed by Portuguese regulation. The base load swaps settled in the clearing house located in Spain – MEFF Power, operating since 21 March 2011, with a new denomination (BME Clearing) since 9 September 2013 – show initially large values due to low registered volumes, as this clearing house is mainly used for short maturity (daily and weekly swaps). The net position ratio can be a powerful oversight tool for energy regulators when accessing to all the derivatives transactions as envisaged by European regulation on Energy Market Integrity and Transparency (“REMIT”), in force since 28 December 2011. The ex-post forward risk premium tends to be positive in all existing mechanisms (OMIP futures, OTC market and CESUR auctions) and diminishes due to the learning curve and the effect – since year 2011 – of the fixed price retributing the indigenous coal fired generation. Comparison with the forward generation costs from natural gas (“clean spark spread”) – obtained as the difference between the power futures price and the forward generation cost with a gas fired combined cycle plant taking into account the CO2 emission rates – is also performed. The power futures are strongly correlated with European gas prices. The clean spark spreads built with prompt contracts tend to be positive. The biggest clean spark spreads are for the month contract, followed by the quarter contract and then by the year contract. Therefore, gas fired generation companies can maximize profits trading with contracts of shorter maturity. Market monitoring reports by the market operator providing post-trade transparency, OTC data access by the energy regulator, and assessment of the regulatory risk can contribute to efficiency gains. The same recommendations are also valid for a potential Iberian gas futures market, once an Iberian gas hub – currently in a design phase, with monthly meetings amongst the stakeholders in a Working Group led by the Spanish energy regulatory authority since January 2013 – is operating. The Iberian gas hub would bring transparency attracting more shippers and improving competition and thus its efficiency, as no gas price is currently disclosed in the existing OTC market.

Double Reasonableness and the Fourth Amendment

Recently the Supreme Court has placed new limits on both the substance of the Fourth Amendment and the exclusionary that serves as the principal remedy for Fourth Amendment violations. In this Article we briefly summarize these limitations and then argue that the curtailment of the exclusionary rule has the potential to ameliorate substantive Fourth Amendment doctrine. The limited reach of the modern exclusionary rule provides the Court with license to develop an expansive new substantive framework free of the specter of a correspondingly expansive remedial framework. One point on which nearly all jurists and commentators agree is that current Fourth Amendment doctrine is a mess. We argue that the Court’s exclusionary rule cases, while frustrating and ill-conceived if viewed in isolation, provide the Court with an opportunity to revisit problematic Fourth Amendment doctrine that was born under a very different remedial regime. Such an approach would allow the Court to adhere to its current view of the exclusionary rule as a remedy of last resort while creating a Fourth Amendment with teeth. The goal is a Fourth Amendment right that is more substantial and clearly defined, but a remedy that remains limited to egregious violations of clear substantive rules. The time is now to lift the Fourth Amendment fog.

A Copernican Turn for Banking Union. CEPS Policy Brief No. 290, 14 May 2013

Despite apparent consensus that the creation of a ‘Banking Union’ is essential for the survival of the euro, progress is painfully slow. The Single Supervisory Mechanism may not be ready before the middle of next year, the Single Resolution Mechanism may require a laborious change of the EU Treaty and common deposit insurance has been postponed into the indefinite future. Any real progress has been prevented by the protracted fights over which government will be the payer of last resort when banks fail because of past bad loans. In this Policy Brief, Thomas Mayer suggests that a radically new approach is needed if there is any prospect of moving beyond this impasse to reach full Banking Union. Instead of trying to move from common bank supervision over to resolution and then on to deposit insurance, he argues that policy-makers should go backwards and start with deposit insurance, move from there to resolution, and end with supervision.

Central bank cooperation during the great recession. Bruegel Policy Contribution. Bruegel Policy Contribution 2013/08, 20 June 2013

During the Great Recession, central banks went well beyond their normal operations and provided liquidity in unlimited amounts, in foreign currency and to foreign banks. Central bank cooperation took the form of a swap network, and amounted to an episode of global monetary policy. However, though bank cooperation will continue to contribute to global governance, the swap network should not be made permanent and given an institutional basis to provide international lending of last resort. Swaps are a monetary policy tool and should continue to be decided on by central banks like all other monetary policy tools,to avoid impinging on their independence, which a difficult historical process has shown to be the best basis for price stability.

A Copernican turn in Banking Union urgently needed. CEPS Policy Brief No. 297, July 2013 [is another Brief with no. 297]

Despite broad agreement among central bankers, policy-makers and economists that creation of a ‘Banking Union’ is essential for the survival of the euro, progress in building this union has been painfully slow. This is largely due to the protracted fights over which government will be the payer of last resort when banks fail because of bad loans made in the past. Taking a cue from Copernicus, Thomas Mayer suggests in this new CEPS Policy Brief that the impasse may be broken by turning the whole process on its head. So, instead of trying to move from common bank supervision, over to bank resolution and then on to deposit insurance, he proposes reversing the process by starting with deposit insurance, moving from there to resolution and ending with supervision.

Emerging Markets' Euro Nemesis. CEPS Commentary, 9 September 2013

In this new commentary, CEPS Director Daniel Gros argues that the weakening of European demand triggered by austerity is the real cause behind the recent deterioration of emerging markets’ current accounts. As a consequence, unless the US resumes its role as consumer of last resort, the latest bout of financial-market jitters will weaken the global economy again.

Enforcement in the EU Single Market. CEPS Paperbacks. October 2012

Enforcement of and compliance with laws and regulations in the single market of the European Union are not only legally necessary, but also of crucial economic importance for business, consumers and the EU economy at large. This book provides a comprehensive overview of the current EU enforcement landscape and its functioning. The classical infringement route via the Court of Justice of the European Union remains critical as a last resort, but it is increasingly seen as very slow and costly. The new emphasis relies heavily on a range of pre-infringement as well as preventive initiatives that prevent new technical barriers from arising. They also tend to be far less costly and more rapid, informal and effective in pursuing a properly functioning internal market. These improvements are welcome news for the single market, yet EU enforcement still has problems to solve, for example in the area of public procurement.

Designing a Genuine EMU: Which "Unions" for EU and Eurozone? Bruges European Economic Policy (BEEP) Briefing 34/2014

The initial ‘framing’ (in the summer of 2012) of the ‘genuine EMU’ for the wider public suggested to design an entire series of ‘unions’. So many ‘unions’ are neither necessary nor desirable – only some are and their design matters. The paper critically discusses first the negative fall-out of the crisis for EMU, and subsequently assesses the fiscal and the banking unions as accomplished so far, without going into highly specific technical details. The assessment is moderately positive, although there is ample scope for further improvement and a risk for short-term turbulence once the ECB has finished its tests and reviews. What about the parade of other ’unions’ such as economic union, social union and political union? The macro-economic imbalances procedure (MIP) and possibly the ESRB have overcome the pre-crisis disregard of macro competitiveness. The three components of ‘economic union’ (single market, economic policy coordination and budgetary disciplines) have all been strengthened. The last two ‘unions’, on the other hand, would imply a fundamental change in the conferral of powers to the EU/ Eurozone, with drastic and possibly very serious long-run implications, including a break-up of the Union, if such proposals would be pushed through. The cure is worse than the disease. Whereas social union is perhaps easier to dismiss as a ‘misfit’ in the EU, the recent popularity of suggesting a ‘political union’ is seen as worrisome. Probably, nobody knows what a ‘political union’ is, or, at best, it is a highly elastic notion: it might be thought necessary for reasons of domestic economic reforms in EU countries, for a larger common budget, for some EU tax power, for (greater) risk pooling, for ‘symmetric’ macro-economic adjustment and for some ultimate control of the ECB in times of crisis. Taking each one of these arguments separately, a range of more typical EU solutions might be found without suggesting a ‘political union’. Just as ‘fiscal capacity’ was long an all-or-nothing taboo for shifting bank resolution to the EU level, now solved with a modest common Fund and carefully confined but centralised powers, the author suggests that other carefully targeted responses can be designed for the various aspects where seen as indispensable, including the political say of a lender-of-last-resort function of the ECB. Hence, neither a social nor a political union worthy of the name ought to be pursued. Yet, political legitimacy matters, both with national parliaments and the grassroots. National parliaments will have to play a larger role.

The eurozone in bad need of a psychiatrist. EuropEos Commentary No. 6, 9 December 2010

Stefano Micossi, Director General of Assonime and member of the CEPS Board of Directors, observes in a new EuropEos Commentary that there is something surreal to the unfolding financial crisis of the eurozone, as the leaders grudgingly do what is needed to prevent disaster just minutes before it’s too late, and then in the next minute revert to the same behaviour that had brought them against the wall in the first place. He cites rising sovereign spreads within the area as the visible result of this strategy: they signal investors’ expectation that the future can only bring more of the same, a series of ever-larger sovereign debt crises, under Damocles’ sword that at some stage Germany, the paymaster of last resort, will close its purse and let Armageddon start.

What if the Next Financial Crisis Hits the Banking Union? A Call for an “If All Else Fails” Clause. European Policy Brief No. 16, September 2013

This Policy Brief argues that the envisaged design of the Banking Union risks not being sufficient to deal with the next large-scale financial crisis. Therefore, an “if all else fails” clause should be approved, stating that the Banking Union members can provide joint last resort financing to deal with a future crisis. An agreement on the clause should be feasible because it is beneficial to all Member States.

The Monetary Policy of the European Central Bank (2002-2015). CEPS Special Report No. 109/May 2015

This paper examines the policies pursued by the European Central Bank (ECB) since the inception of the euro. The ECB was originally set up to pursue price stability, with an eye also to economic growth and financial stability as subsidiary goals, once the primary goal was secured. The application of a single monetary policy to a diverse economic area has entailed a pronounced pro-cyclicality in its real economic effects on the eurozone periphery. Later, monetary policy became the main policy instrument to tackle financial instability elicited by the failure of Lehman Brothers and the sovereign debt crisis in the eurozone. In the process, the ECB emerged as the lender of last resort in the sovereign debt markets of participating countries. Persistent economic depression and deflation eventually brought the ECB into the uncharted waters of unconventional policies. That the ECB could legally perform all of these tasks bears witness to the flexibility of the TFEU and its Statute, but its tools and operating procedures were stretched to their limit. In the end, the place of the ECB amongst EU policy-making institutions has been greatly enhanced, but has entailed repeated intrusions into the broader domain of economic policies – not least because of its market intervention policies – whose consequences have yet to be ascertained.

The Monetary Policy of the European Central Bank (2002-2015). Bruges European Economic Policy Briefings (BEEP) 35/2015.

This paper examines the policies pursued by the European Central Bank (ECB) since the inception of the euro. The ECB was originally set up to pursue price stability, with an eye also to economic growth and financial stability as subsidiary goals, once the primary goal was secured. The application of a single monetary policy to a diverse economic area has entailed a pronounced pro-cyclicality in its real economic effects on the eurozone periphery. Later, monetary policy became the main policy instrument to tackle financial instability elicited by the failure of Lehman Brothers and the sovereign debt crisis in the eurozone. In the process, the ECB emerged as the lender of last resort in the sovereign debt markets of participating countries. Persistent economic depression and deflation eventually brought the ECB into the uncharted waters of unconventional policies. That the ECB could legally perform all of these tasks bears witness to the flexibility of the TFEU and its Statute, but its tools and operating procedures were stretched to their limit. In the end, the place of the ECB amongst EU policy-making institutions has been greatly enhanced, but has entailed repeated intrusions into the broader domain of economic policies – not least because of its market intervention policies – whose consequences have yet to be ascertained.

Firmer foundations for a stronger European Banking Union. Bruegel Working Paper 2015/13, November 2015

The move to European Banking Union involving the supervision and resolution of banks at euro-area level was stimulated by the sovereign debt crisis in the euro area in 2012. However, the long-term objective of Banking Union is dealing with intensified cross-border banking.The share of the assets of national banking systems that come from other EU countries was rising before the financial and economic crisis of 2007, but went into decline thereafter in the context of a general retrenchment of international banking. Most recent data, however, suggests the decline has been halted. About 14 percent of the assets of banks in Banking Union come from other EU countries, while about a quarter of the assets of the top 25 banks in the Banking Union are held in other EU countries.While a crisis-prevention framework for the euro area has largely been completed, the crisis-management framework remains incomplete, potentially creating instability. There is no governance mechanism to resolve disputes between different levels of crisis-management agencies, and incentives to promote optimum oversight are lacking. Most importantly, risk-sharing mechanisms do not adequately address the sovereign-bank loop, with a lack of clarity about the divide between bail-in and bail-out.To complete Banking Union, the lender-of-last-resort and deposit insurance functions should move to the euro-area level, breaking the sovereign-bank loop. A fully-fledged single deposit insurance (and resolution) fund should be favoured over a reinsurance scheme for reasons of cost and simplicity.

American negligence reports,

"All the current negligence cases decided in the federal courts of the United States, the courts of last resort of all the states and territories, and selections from the intermediate courts, together with notes of English cases and annotations." (varies)