Tankard natural gas indexes greeted with scepticism

A trio of interdealer brokers launched a new series of indexes for European natural gas on February 6 – a move that comes amid fears about the reliability of assessments by price reporting agencies (PRAs). But while some industry observers are praising the offerings, known as the Tankard indexes, traders have yet to be convinced.

Backed by London-based Icap, Marex Spectron and Tullett Prebon, the Tankard indexes comprise day-ahead, weekend-ahead and month-ahead indexes for prices at four major European gas hubs. They include the liquid UK National Balancing Point (NBP) and the Dutch Title Transfer Facility (TTF), as well as two German hubs – NetConnect Germany and Gaspool. Each Tankard index consists of a volume-weighted average of executed prices for eligible natural gas transactions brokered by the three firms.

All-day indexes are published for the day-ahead, weekend-ahead and month-ahead indexes, capturing transactions brokered from the beginning of the trading day until 5:30pm UK time. For NBP and TTF, two additional day-ahead and weekend-ahead indexes are calculated using only transactions conducted from 3:25pm until approximately 3:30pm.

According to the firms, the trades are sorted from highest to lowest and any outliers are stripped out. The resulting indexes are published to three decimal places, together with the corresponding traded volume and the highest and lowest prices used in the calculation.

Richard Frape, London-based director of market services at Marex Spectron, says the creation of the Tankard indexes was driven by demand from clients. “There seems to be an underlying move towards trade-backed indexes and so obviously we’re in a very good position to supply them,” he says.

I don't really see what added value these Tankard indexes bring over the Leba indexes

If there are not enough physical gas transactions to provide an accurate reading, the index methodology includes contingency plans, such as extending the time frame for the index calculation, or reverting to an average of prices during the previous five days. That approach stands in contrast to PRAs, which typically base their assessments on trades that occur close to the end of the trading day and augment them with subjective judgement when liquidity is patchy.

The element of subjectivity in PRA price assessments has come under fire as supervisors seek to strengthen the regulation of financial benchmarks, while questions about the role of PRAs in the gas market were highlighted by the alleged manipulation of NBP in November 2012.

“The PRAs have an established way of doing things and some people like that. But others want actual, visible trades to be the thing that determines the price, rather than an end-of-day assessment, especially on a very liquid product such as NBP day-ahead. So that’s what we’re providing,” says Frape.

However, market participants point out the Tankard indexes are not the only alternative to using PRAs. The London Energy Brokers’ Association (Leba) already provides natural gas indexes based on the volume-weighted averages of trades conducted at a range of European hubs. They include those covered by the Tankard indexes, with the exception of NBP. Meanwhile, energy exchanges such as the Leipzig-based European Energy Exchange and Amsterdam-based APX-Endex also provide natural gas indexes, although these only reflect the exchange-traded market and do not include over-the-counter trades.

“There are similar indexes produced by Leba, which is an amalgamation of all the main brokers, so I don’t really see what added value these Tankard indexes bring over the Leba indexes,” says a Zürich-based natural gas trader at a large European utility. Despite the launch of the Tankard indexes, Icap, Marex Spectron and Tullett Prebon remain among the five firms that contribute to the Leba indexes. Because the Leba indexes are based on transactions executed by a bigger range of brokers, they provide a fuller picture of the market, the trader asserts.

A London-based natural gas trader at another European utility agrees. “I don’t know quite what [the Tankard indexes] are trying to do that’s different from Leba,” he says.

Meanwhile, PRAs argue their assessments, which also consider data on firm bids and offers, provide a better insight into the market than transaction-based indexes. “Just because [our assessment] is not an average of deals, it does not mean it’s not based on firm evidence. There are firm bids and offers in the market, particularly for NBP and TTF, which are very liquid,” says Louise Boddy, director of global energy markets at London-based PRA Icis Heren.

Some market observers praise the Tankard indexes for offering more transparency in a market that has traditionally been seen as opaque. “It’s a very useful addition to price reporting,” notes Howard Rogers, senior research fellow at the Oxford Institute for Energy Studies, an independent research centre of the University of Oxford. He notes that Leba charges a subscription for the use of its indexes, while the level of the Tankard indexes is freely available from the index website. “For the Tankard parties to provide this information in the public domain is a good step forward in terms of transparency and data availability,” he says.