Solutions for a volatile market

This interview sees Alexy Mileev, CEO and founder of Route4Gas, discuss the company’s latest offering designed to reduce post-trade risk.

Extreme volatility continues across European energy markets and gas prices are showing a more than 2000% increase since record lows in May 2020. As a consequence, major market players had to extend their credit lines significantly to manage higher prices. This comes at the cost of higher margin calls and fewer trade opportunities, adding the problem of reduced liquidity to the gas market. To help solve these problems, the Amsterdam, Netherlands based company Route4Gas has announced it is now ready to offer post trade risk reduction services. This will offer to the European gas market a solution that significantly reduces market exposure and is unique, multilateral, fully automated, anonymous and crossmarket. In this discussion, Alexy Mileev, CEO at Route4Gas, explains the problems he sees and how his company can help resolve them.

How would you describe the problem the European natural gas market is currently facing? If you look at the TTF price curve recently, it actually looks more like the Burj Khalifa than anything else. While there are still many uncertainties on the exact causes of this, and whether they are supply or demand driven or a combination of both, the results are very clear: a huge increase in prices and volatility.

This in turn brings certain risks into the market. There are extreme margin calls, we don’t talk about millions – we talk about billions at the moment. How can the market

participants pay that? Trust in OTC Markets has been lost and from April to October 2021, OTC trades reduced for 80%. The new trades are done almost exclusively via clearing. This is a clear indication that trust in the entire gas market has eroded. Credit risk and counterparty risk are perceived as very high at the moment. And it is not just companies that are in trouble, it is the entire market that is in trouble. And as the reduced trust leads to fewer trades, that leads to an even lower liquidity, which in turn leads to more volatility and higher prices – a vicious circle.

So how do we break this circle and prevent a domino effect impacting the market? It is here that the Route4Gas post-trade risk reduction service can help by restoring bilateral trust. We have adjusted the

Figure 1. Georg Giokas, CCO at Route4Gas announces PTRR solution.

Figure 2. Route4Gas team in Amsterdam. algorithm we already use for our optimisation services and can now use it to enable much more efficient use of credit lines. We can do this for all market participants, and as we really want to play our part in returning the OTC trading to normal, we will be offering this service free of charge.

Can you give a high-level explanation of how this would work? The idea is very simple. Customers submit their positions with counterparties they want to reduce. This is done anonymously: no one will see this, not even Route4Gas. That means there is no way of ‘pushing’ volumes into the market. It’s not about adding volumes in the market or to your position, it is about finding offsetting positions that reduce overall exposure and risk. After these positions are submitted, the algorithm in our system looks for the possible cycle trades. But this is not simple triangulation, as the system finds cycles including multiple counterparties. Also, this will only require a few seconds of calculations, after which traders will receive the resulting trades in their ETRM system. There is only risk reduction, there will never be an additional position that a customer will receive as a result of participating in the Route4Gas PTRR system.

What makes this unique? Is anything like this offered already in the market? What makes it unique is the simplicity, the speed and automation, the anonymity and the fact that we can involve not only three but many more parties simultaneously. No other service offers this at this speed.

Can you explain more about the company behind this service? Route4Gas, a Dutch Startup, currently employs 16 people throughout Europe. It offers the European gas market a solution that is designed for gas traders, operational teams and portfolio managers: and now, also risk managers.

The core of the system is a non-discriminatory algorithm that matches physical and financial gas positions across all participating clients in an automated and fully anonymous way. It unlocks existing opposite trading interests and calculates matching possibilities only on this basis. Through that, it significantly increases the opportunities to get matched and supports liquidity in all markets. Furthermore, the Route4Gas tool couples not only all European marketplaces but also qualified storages, unused transport capacities and existing flows.

It started as my idea in 2016. I looked intensively into the gas market and tried to understand everything about physical flows and bookings. After a while, I realised that there was much potential for optimisation in the European gas industry, and that something had to be done about that. As the third energy package had been adopted in Europe in 2009 and all the rules for European gas and energy were standardised accordingly in each European country, the market was already transparent. We collected all the data online. Having all this information together with historical data, it was possible to create a unique algorithm.

PIPELINE PRODUCTS

TM

As a mathematician, I tried to solve that optimisation issue and came up with an algorithm that would revolutionise the industry. What started with only transport and capacity positions now includes trading storage and post-trade risk reduction too, and will soon be expanded to LNG.

What value do you think you can add in addition to post-trade risk reduction? Route4Gas has collected data about the whole European gas market from 15 different sources starting from 2015. Those data consider information about gas transmissions, capacity bookings, tariffs, storages, imports, LNG terminals etc. Analysing this information, we see that the total cost of gas transmission in Europe between different countries is approximately €5.5 billion. When we apply our algorithm to these positions, we see that optimisation in excess of 20% is possible. The main target of our company is to unlock this optimisation and help our customers save this €1 billion+ in costs per year.

So the anonymity does not only apply to posttrade risk reduction? It applies to all the services we offer. The anonymity is embedded in our system and has been underlined through a patent. This is a double win situation: you get access to liquidity and outstanding functionality, and you stay anonymous at any time. The system processes encrypted data (positions and creditworthiness) and discloses the resulting trades only to the respective counterparties. Security is one of the cornerstones of Route4Gas from the very beginning. We apply best industry practices and standards when developing the product.

What are some of the latest developments around Route4gas?

Figure 3. Alexey Mileev, CEO and Founder at Route4Gas.

Figure 4. Route4Gas analytical map. Early in 2020 VierGas Participation GmbH, the 100% owner of the biggest German TSO Open Grid Europe GmbH (OGE), acquired a 25% stake in Route4Gas B.V., becoming an important strategic partner. The investment from a major player in the European Market underlines the value and reliability of our services.

Route4Gas went live on 1 September 2020, and customers have achieved a matching rate up to 61% per round. 18 European gas companies have already signed Client Agreements with us, showing their trust in this unique solution.

In June 2021, the company changed its regulatory status, becoming an organised market place (OMP). The evolution of Route4Gas into an OMP is simplifying the use of its services by enabling clients to execute deals directly in the Route4Gas application and ensuring automatic trade reporting to EU Agency for the Cooperation of Energy Regulators (ACER).

Could you explain your regular service in some more detail? How does it compare to post-trade risk reduction? In the Route4Gas system the participants can enter all their mainly physical positions in each

market. A mathematical model then finds the optimal way to match them with positions from other customers.

We are matching physical and financial positions in all different gas hubs in Europe. Just to have an idea what can be submitted: it’s not just simple location swaps, but unused capacities, existing flows, storage positions, etc. can all be submitted as well. Even an LNG product has already been developed in our system. We are planning to launch it in the near future. Imagine, that all market participants submit all their positions on the same place at the same time – fully anonymously. The matching and trading potential is huge!

The whole process from data transfer into the system, price check and matching takes a maximum of 20 minutes and provides various possibilities to trade the fixed prices in the system against the broker market and takes off a lot of risk in view of illiquid markets.

Traders are impressed by the speed at which the system is able to analyse hundreds of positions and come up with complex solutions. It would take a trader days to arrange some of these deals that the system can find in a matter of seconds.

But it’s important to mention that R4G is not a broker. The so-called ‘matching rounds’ are comparable to single round auctions. The market price spreads are fixed for the round and the customers just submit their positions if they agree with the prices. Such rounds will be run up to 4 times a day.

Post Trade Risk Reduction is simply an additional service that’s being offered. From now on Route4Gas clients are also able to submit anonymously their positions on EU gas hubs into regular netting sessions at convenient fixed time. Within seconds of calculation our algorithm generates a number of trade deals, offsetting their exposure and symmetrically reducing risks to each counterpart. There will be no risk at all of ending up with new positions. The Route4Gas post-trade risk reduction services will not create new obligations with third parties, offering only the reduction of initially uploaded positions.

What do your long-term ambitions look like? Route4Gas will continue to develop its system. It will become a 24/7 system maintaining the single round auctions. Users will be able to add or remove positions at any time. The number of products will increase, but only to an extent that is of interest to customers and while maintaining the simplicity it has right now.

From Route4Gas’ point of view, the further growth will support illiquid markets in their development in the sense of market regulation, small and medium-sized companies will be able to participate in new opportunities in equal measures as well as the large ones. Opportunities will arise for storage operators, which will support the flexibility in the trading market and make it equally accessible.

THE BEST OF CORROSION & COATINGS+

Corrosion and coatings professionals – get the best of the industry in one place. The inaugural AMPP Annual Conference & Expo brings two flagship conferences together in San Antonio. Meet with industry experts and be part of the most current technical symposia, industry forums, workshops, and standards meetings.

Network with colleagues from around the world. Participate in shaping the future of the industry. Explore the latest technologies and products on the exhibit hall floor.