Response to consultation on ASX Electricity Options strike increment
Fri 25 Aug 2023
ASX has now released its response to consultation on ASX Electricity Options strike increment in ASX Notice 0857.23.08.
ASX recently consulted on changes to the strike increments across quarterly Australian and New Zealand Electricity Options (see Notice 0521.23.06). The consultation proposed increasing the strike increments on quarterly Electricity Options to $5 from the current $1 increment. The purpose of the change was to support more efficient and effective strike listing and trading, particularly in light of challenging market conditions experienced over the past 12 months.
ASX received responses from a range of Market Participants in the form of written and bilateral feedback. While there was broad support for the proposed change, concerns were raised around the need to trade at finer ($1) strike increments, particularly given recent lower price trends. All Participants felt it was important to be able to switch back to finer strike increments in a timely manner should prices decline further.
Further analysis and consultation
Considering this feedback, ASX undertook further analysis on Open Interest trends in varying market conditions. The analysis showed that in the Australian Electricity Option contracts, when prices are lower and relatively stable, Open Interest tends to fluctuate between the $1 and $5 strike increments. This is in contrast to the current Open Interest split where more than 90% of Open Interest is concentrated at the $5 strike increment.
The New Zealand Electricity Options analysis showed a different trend with Open Interest remaining concentrated at the $5 strike increment despite market conditions. The Australian and New Zealand analysis is presented visually in the attached document.
All respondents felt that it was necessary for ASX to have the ability to switch back to $1 strike increments in a timely manner should market prices decline further. In terms of the appropriate price level at which narrower or wider strike increments should apply, some felt that $100 was the right price level while others felt that $50 would be suitable. For example, when prices rise above $100, strike increments change to $5, when prices go below $100, strike increments change to $1.
In a number of follow up discussions, ASX explained that switching between the two strike increments ($1 and $5) is currently a complicated and time consuming process. ASX highlighted that if strike increments were to go to $5, changing back to $1 strike increments would not be a quick switch and would first require a period of sustained lower pricing. Considering these restraints and recent market conditions, the majority of Market Participants agreed that they would prefer the Australian Electricity Option strikes to remain unchanged at $1. However, most agreed that changing the New Zealand Electricity Option strikes to $5 made sense given the Open Interest concentration.
Balancing the feedback received, current price trends and historical data against our broader licensing obligations, ASX has determined to leave the Australian Electricity Option strike increments unchanged at $1 and widen the New Zealand Electricity Option strike increments to $5, subject to regulatory approval. The change will take effect from the commencement of trading on 2nd October 2023.
Below are the key points relating to the change:
- $5 strikes will apply to quarterly New Zealand Electricity Option contracts only (EE and EA).
- $5 strikes on New Zealand Electricity Options are now available in the Customer Development Environment (CDE+) for testing.
- The revised auto strike listing range will change from $20 to $50 either side of the ‘At The Money’ strike i.e. 10 strikes either side.
- Strip options (EB and EF) will remain unchanged and continue to list at $1 strike increments.
- Existing Electricity Option strikes already listed at the $1 increment will remain unchanged i.e. listed in $1 increments. Existing Electricity Option positions and Open Interest will also remain unchanged.
- In the event that electricity prices were to decline substantially below current levels for a sustained period, New Zealand Electricity Option strikes may revert to the finer $1 strike increment, subject to market feedback and regulatory approval.
- Marked up changes to the ASX 24 Procedures are attached.
What do I need to do by when?
Participants are encouraged to review the attachments within this notice and login to the CDE+ environment to view and test $5 strikes on New Zealand Electricity Options.
Need more information?
Senior Manager, Commodities
(02) 9227 0420
(02) 9338 000