The Growing Role Of Bilateral Trading In The Finnish Power Market

As market conditions are in a constant change, bilateral trading is becoming more and more important in Finland’s power sector. Fingrid’s recent study highlights key aspects of Finland’s hedging market, including market concentration in bilateral trading, liquidity concerns, and the role of physical market improvements in supporting financial markets.

Why Bilatelar Trading seem more interesting than before

• The role of bilateral trading is growing as derivatives exchange costs and collateral requirements have increased significantly during recent years.
• Many organizations have found it necessary to reassess the role of exchanges to reduce administrative burdens, and avoid liquidity challenges.
• Market participants balance market risk, liquidity risk, and counterparty risk to optimize hedging strategies.
• Companies reduce counterparty risk by finding new trading partners, setting credit limits, and incorporating collateral requirements into agreements.

How to Manage Risk in Bilateral Markets

Bilateral trading offers flexibility, but counterparty risk is still a concern. To manage this, there are several possible strategies to be taken into account. 

• Finding more reliable trading partners to reduce dependence on a small number of counterparties
• Setting credit limits to control exposure.
• Using collateral requirements to ensure security in agreements.

Market Concentration and Transparency Challenges

Fingrid’s study highlights also another issue: the bilateral market is concentrated among a few major players. This can limit competition and reduce pricing transparency.

For companies looking to hedge risks effectively, a lack of diverse enough counterparties and transparent pricing can make bilateral trading more complex. To resolve this, well organized OTC marketplaces can provide a more open and efficient environment for securing trades. By interesting view to potential counterparties and improved price transparency, they help market participants better manage the challenges of a concentrated bilateral market.

Conclusion

As Finland’s power market evolves, bilateral trading is playing an increasingly central role in risk management and hedging strategies. Rising collateral requirements, liquidity challenges, and administrative burdens have led many companies to seek alternatives outside traditional exchanges.

While bilateral trading provides flexibility, it also raises concerns about market concentration and transparency. Structured OTC marketplaces help address these issues by enhancing counterparty access and improving price discovery. Moving forward, market participants must continue adapting their hedging strategies to balance flexibility, risk management, and regulatory developments.

References

The following sources were used as references:

Fingrid’s study on Finland’s hedging market
Finnish Energy Authority’s decision on Fingrid’s proposal
ACER’s directive on cross-border hedging solutions

ChatGPT was used to help translate some of the source materials originally written in Finnish.