For the first time in history, investors and industry players have a dedicated exchange to facilitate trade in forestry and paper products including pulp, recycled fibre and wood. A Norwegian company, NOREXECO ASA, has launched a derivatives exchange platform for the pulp and paper industry.
With most forestry and paper derivatives contracts having largely been confined to OTC (over-the-counter) markets until now, the new platform brings transparency and security to market participants from around the world, who can now benefit from a common liquidity pool in an otherwise fragmented trading environment.
The estimated market size on pulp in the open market is approximately 60 million tons, representing a market value exceeding $50 billion.
The estimated market size on pulp in the open market is approximately 60 million tons, representing a market value exceeding $50 billion. Given that many of the world’s largest forestry, paper and pulp companies originate from the Nordic countries, the location of the exchange in Norway is apt.
The launch appears to have been significantly delayed. Indeed, the Norwegian Ministry of Finance gave the green light to NOREXECO to open a regulated market exchange one year ago, at which time the company anticipated that the new exchange would be launched in late 2014, or early 2015.
However, commenting on the timing, Stein Ole Larsen, CEO of NOREXECO, told FInance Magnates: “I am proud of us having managed to build NOREXECO in such a short time as we have. Building an exchange is complex, having a structure with a Celaring House (ECC), Clearing Banks and a Index provider (FOEX) together with the exchange itself. During the project period furthermore the financial sector has adapted to new regulations (EMIR, Dood Frank etc).”
I am proud of us having managed to build NOREXECO in such a short time as we have.
As expected, the first products listed on NOREXECO are two financially settled pulp contracts (NBSK Softwood Kraft Pulp and BHKP Hardwood Kraft Pulp).
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Transactions on NOREXECO will be in full compliance with international regulations for derivatives trades, such as EMIR and Dodd-Frank. Indeed, from the outset all transactions will be cleared and settled by the European Commodity Clearing AG (ECC) in Germany, the central clearing house for energy and related products in Europe.
The exchange will offer Deutsche Börse’s M7 trading platform to all exchange members and brokers.
Commenting on the launch of the new exchange, Mr Larsen said: “We are very excited about opening the exchange. We have received great interest from participants around the world. To start a unique exchange platform for pulp from the Norwegian forestry hub Kongsvinger just outside Oslo has taken some time, but now we are ready to start and are proud of what we can offer to our growing member base.”
Chief Risk Officer of ECC, Dr. Thomas Siegl, was also keen to highlight the implications for the clearing firm: “Through the cooperation with NOREXECO, we extend our clearing offering to a completely new asset class. Offering clearing services for NOREXECO forms yet another milestone for us towards moving to a multi-commodity clearing house. Our standard procedures and processes as well as the uniform risk management approach integrate both existing and upcoming commodity markets.”
The establishment of a new exchange for financial contracts is yet more evidence that OTC markets are becoming increasingly centralised. Indeed, in recent months, we have seen exchange operators such as BATS Global Markets, Deutsche Börse and Nasdaq all make strategic investments to offer derivatives (specifically, foreign exchange) products via centralised venues.
It is about time that the forestry and paper industry gets the same opportunity for risk management as other mature industries.
Indeed, Mr Larsen declared his ambition to give both the industry and the financial sector a regulated exchange for financial contracts: “Despite the fact that it is nearly the same size as the aluminium market, the pulp market does not have an exchange for trading.”
“In a volatile world with great challenges we have been welcomed as a stabilizing factor. We are very optimistic about the opportunity to supplement and to move a share of the trading from the bilateral OTC market to a fully regulated and secure marketplace. It is about time that the forestry and paper industry gets the same opportunity for risk management as other mature industries”, Mr Larsen added.