* GDF Suez eyes new cash-settled products in Central Europe
* Products could help liquidity on Prague's power exchange
By Michael Kahn
PRAGUE, Oct 6 (Reuters) - GDF Suez hopes to launch
cash-settled products based on underlying contracts on the
Prague-based power exchange in the next three to six months, a
move that could help boost liquidity on the nascent bourse,
according to the company's head of European border markets.
Currently, traders can only buy and sell spot and future
electricity for physical delivery on the Power Exchange Central
Europe, which covers the Czech Republic, Slovakia and Hungary.
GDF Suez's financial instruments would be tied to the price
of an underlying annual and quarterly contract on the exchange,
GDF Suez's Frank Brannvoll told Reuters in a recent interview.
"We are at the moment developing financial products we would
like to present to the market participants," said Brannvoll of
GDF Suez Brussels trading. "That does not mean it will be ready
tomorrow but we are pretty confident we will have things up and
rolling over the next three to six months."
One challenge is educating market participants about
benefits such as a big reduction in credit risk when trading
financial contracts, he added.
Other hurdles include a lack of transparent and liquid
indices to "tie" contracts to and legal issues in some countries
that block financial energy trade, Brannvoll said.
Offering financial instruments will lower the threshold of
entrance to the market, drawing in smaller trading houses, banks
and others needed to boost liquidity, he said.
It also makes it easier to trade and hedge risk and will
spill into the physical market and the exchange trading in the
way of better pricing, Brannvoll added.
"The region has been used to the physical way of trading,"
Brannvoll said. "Many people do not have a full understanding of
the risk in financial instruments and some companies are afraid
of losing control over price settings."
"We want the markets to grow so they become transparent and
so we will have opportunities to perform our own hedging
operations there."
The Power Exchange Central Europe has previously said it
wants to offer financial derivatives beginning in 2010 as part
of a plan to become an energy hub for the region.
While volumes are well below those of more established
exchanges in places like Britain or Germany, good grid
connections and plenty of capacity make for a potentially
lucrative power trading market.
The Czech Republic's location next to Germany, Europe's
biggest economy and largest power market, is also an advantage.
Brannvoll, whose company is a market maker on the
Prague-based bourse, said the key is starting simple with a sort
of contract for difference that is cash settled against the
current market price of an underlying physical contract.
"We would like to come up with a product we can get a
critical mass of market participants behind who want to trade
and at the same time limit credit exposures," Brannvoll said.
(Editing by James Jukwey)
