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Watch: LNG: JKM Swaps trading continues to surge

The growth in the JKM swaps LNG derivatives market has been explosive. In this video, senior managing editor Marc Howson looks at the acceleration of trades in JKM swaps, and the increase in the number of participants, including major portfolio players like Shell, BP and Gazprom. He also delves into the start of the role of TOCOM's in the swaps market as it starts offering JKM swaps through the Japan OTC exchange in April.

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Video Transcript

LNG: JKM Swaps trading continues to surge

By Marc Howson, Senior Managing Editor, LNG, Asia

Welcome to the Platts Snapshot, our series that examines the forces shaping and driving global commodity markets today.

In this episode, we’ll look at the explosive growth in the JKM swaps LNG derivatives market.

Trade in JKM swaps has more than quadrupled in 2016 from 2015. Broker and ICE data show that 12,717 lots of JKM swaps were cleared through ICE over 2016. Ice is also where the vast majority of the trade is cleared. That’s almost 43 cargoes worth of JKM swaps for the year.

The acceleration of growth began in Q3 2016, which has continued into February 2017, averaging just under 7 cargoes a month over the past six months to date. Traded JKM swaps volumes in 2017 year to date is over 6,000 lots.

Participation in the JKM swaps market has also grown significantly over the past few years, with the market now comprising of between 20 and 30 counter parties.

Market players include the major portfolio participants like Shell, BP and Gazprom, to European utilities like RWE and Centrica. Trading houses, including those from Japan are also active along with the financials like Citi, and Goldman. More recently, Asia-based end-users have shown increasing interest in hedging and some have joined the market through their trading offices in the Atlantic.

Market for JKM Swaps is mostly active in the Atlantic

While trade in physical cargoes into Northeast Asia is largely tracked by the JKM is largely done out of the Pacific basin, the market for JKM swaps is mostly active in the Atlantic, out of main European commodity trading centers of London and Switzerland.

The JKM swaps market has also grown in diversity. Only prompt months were traded five years ago, and now, we’re seeing anything from quarters, seasons, calendar years and even spread trades.

In February this year, we saw trades in quarters exceed trades in monthly JKM swaps, while there was activity as far out as winter, and even the first quarter of 2018.

Market sources have also said that outside of participants seeking like-for-like LNG hedges in the swaps market, they have also noticed increasing activity that indicated that there was a trend towards more pure trading as well.

Currently the vast majority of JKM Swaps are understood to be cleared through ICE. In addition, from April 3, TOCOM will be offering JKM swaps through the Japan OTC Exchange, JOE, clearing through CME, both settled on a cash basis. This has been facilitated by the deregulating Japanese gas and power sectors. This could further increase JKM swaps trading.

So, until next time on the Snapshot, we’ll keep an eye on the markets.