Markit: Gathering and Mining the Data for Tomorrow’s Ecosystem Marketplace

When the Bay Bank chose Markit Environmental Registry as the backbone of its regional ecosystem marketplace last week, bank insiders said that Markit aggressively pursued the deal while competitors didn’t. That aggressive approach – coupled with cutting-edge data mining – has made Markit a leader in both traditional and environmental finance.

Third in the series Building the Ecosystem Marketplace.

14 September 2009 | Attend enough conferences related to ecosystem markets, and you soon figure out the secret to Helen Robinson’s success: she isn’t one person, but rather a set of identical triplets. One of them lives in the United States, one in Europe, and one in New Zealand. That’s why you see her at a carbon conference in Washington one day, track her to a meeting in London the next, and catch her tucking her kids into bed in Wellington the day after that.

It also explains the frantic pace that the TZ1 Registry managed to maintain last year, before New Zealand stock exchange operator NZX Ltd sold it to Markit Financial Information Services in June of this year. That deal created the Markit Environmental Registry, which blends one of the environmental world’s leading registries with one of the world’s leading data mines – for in less than a decade, Market Financial Information Services has carved out a very narrow and valuable niche within that broad field: namely, that of pre-eminent cruncher of numbers in the notoriously fragmented and opaque over-the-counter (OTC) derivatives space.

Prior to the merger, Robinson – then acting as TZ1 CEO – had been running a full-court press to sign the most credible ecosystem market players onto deals with TZ1 – preferably in an exclusive arrangement.

Today, as Managing Director of the Markit Environmental Registry, this former Microsoft exec isn’t resting on her laurels. She’s currently in talks with untold players in the carbon offset community and a handful of cutting-edge providers in the mitigation banking sector – including the Willamette Partnership, Mission Markets, Defenders of Wildlife, as well as ourselves (TZ1 co-sponsored the most recent State of the Voluntary Carbon Markets report) – and these are just the ones we know of.

Deals to Date

Last year, TZ1 became one of three registries keeping track of credits under the Voluntary Carbon Standard, as well as the exclusive registry for Social Carbon Credits.

This year, before the merger, TZ1 launched the RFI Platform for voluntary carbon credits, while Markit teamed up with European carbon platform BlueNext to launch carbon indexes and with the Carbon Disclosure Project to launch stock indices for companies with solid carbon management strategies. Since the merger, the Markit Environmental Registry has become the official registry for the Bonneville Environmental Foundation’s Water Restoration Certificates, which are designed to restore water flow in depleted rivers and streams, and for the Bay Bank, which aims to create an ecosystem marketplace that finances conservation and restoration efforts in North America’s Chesapeake Bay by turning actions that improve the Bay into verified environmental credits. Markit will both help create those credits and keep track of them as they’re bought and sold over time.

Markit: The New Gorilla of Environmental Finance

Backed by a consortium of investment banks, Markit has spent most of the last decade culling prices and other carefully-selected details from complex transactions on the books of secretive trading houses and then identifying the sweet spots where knowledgeable buyers and sellers overlap. This ‘scrubbing’ yielded fair-market prices that the market could trust – and, more importantly, prices that held up in the turbulence of the past year.

In June, we spoke to Niall Cameron, Markit’s Executive Vice President of Commodities, Indices, Equities and Risk Management, and asked him what his company had in store for the ecosystem marketplace. In light of what they’ve accomplished since, we’ve chosen to run the interview in its entirety here:

EM: You and BlueNext recently announced that you will be creating carbon indices that will eventually form the underlying basis for exchange-traded derivatives. How does this work, and do you see yourselves creating indices based on over-the-counter (OTC) products as well?

Cameron: From exchange data, we are able to create indices that allow people to trade and to structure products, and eventually we will bring that to bear in the OTC market as well. Alternately, when the OTC market gets very active, we will bring in our trade-processing businesses – matching the trades – but at this stage there are not enough trades going through for a trade processing system to be necessary.

All the data flowing through the environmental registry will be publicly-available – so, what advantage do you gain as the owner of that registry, when it comes to creating indices?

Being the owner of a registry is extremely useful because you get to feel where the growth is coming from and can position yourself accordingly. That’s why the registry is so important: it’s almost the first point of call, because when someone gets a credit he has to register it, and we will see quite clearly how some of these new sectors are growing.

Are you limiting this to carbon, or will you be moving into other ecosystem markets?

Our registries side will be capturing credits from all kinds of projects, including wetland mitigation banking. Before we can create indices, we need to see enough quality data, and then we can develop indices. It is likely that we will be rolling out these indices into those areas when there is demand for the indices and there is enough data. The criteria are that there are multiple people playing in the market and there is a materiality of data. If you have very sporadic data points, very few trades for example, it is very hard to put an index together. You need enough data and enough interested people.

For example, the carbon market now has a need for indices because there are a lot of players in the market and a lot of good data points. For some of these other environmental areas, they are really just beginning and it is too early to put an index in place.

Obviously, carbon is the main market at the moment and will continue to be for a while, but going forward you can see many, many different types of environmental products being listed. That is when price is going to get very interesting, because there’s going to be a lack of knowledge about where some of these things should trade.

Which market do you see taking off first after carbon?

We are interested in how the water market develops. Unlike carbon credits, water is a real commodity, and possibly the most important one in the world.

You guys have made a name for yourselves in the OTC derivatives space for being able to sift through massive and complex portfolios and come up with a reliable valuation. Now you’re coming into the ecosystem marketplace, where companies will be holding diverse environmental portfolios that contain carbon and other assets and will need to calculate the real value and risk of those portfolios. When might we begin to see these types of valuation services offered in the ecosystem marketplace?

Markit’s valuation tools use market-leading consensus data and proprietary models, carefully calibrated to market levels. Markit provides fair values for a range of liquid and illiquid securities, structured products and derivatives. We use our valuation technology in order to help people value a portfolio. Markit’s innovative valuations services provide fair values for a range of liquid and illiquid securities, structured products and derivatives. We start with the data, move into the indices, then move into processing, and finally into valuation.

TZ1 recently launched the RFI Platform, which is designed to help facilitate OTC transactions, but looks like the kind of thing your clients – especially those offering exchange platforms – might see as competition. How does this platform fit into Markit’s strategy – and are your risking alienating some of your customers by creating it?

That’s the type of thing that Markit will bring into the environmental markets. We’ve taken the core of the registry and added something on top of it which takes it to another level. There will be a series of those next-level moves we will make over the next 12 months that will probably give us a very strong position in the market.

RFI, however, is not an exchange; because if it were an exchange, you would transact on it, and we have no plans to do so. We’re matching up the buyers and sellers, and getting them connected. They will execute their trades away from this – either bilaterally or by putting their trades through an exchange.

Will Markit intentionally avoid becoming an exchange?

At this moment in time we do not execute trades in any asset class. But you can never say never. If you look at some of the other things we’ve done or that we brought to other markets, there is a lot of work to do around data and data transparency – accumulating the data and cleaning it up and then feeding back the better data set to the market. To me, raw data is like a raw diamond. You take a raw diamond, you polish it, and you put it back into the marketplace.

What do you mean when you talk about “polishing the data”?

We review and refine the data and then we enhance the system. For example Markit Quotes is a real-time quote parsing system that extracts indicative and live over-the-counter pricing from email messages. With Markit Quotes, prices are extracted from the thousands of messages that active market participants receive each day. These messages come in almost any format from multiple sources and are parsed and scrubbed in near real-time. The result is consistent price data that can be used for real-time market indications, idea-generation and analysis.

You’ve said that it’s important to move into this marketplace now, while it’s still evolving, and before too many competitors show up. Can you elaborate on that?

When we look at environmental markets, the competition is not as strong as it is in more established markets. If you look at the more established commodity markets, you have competitors who have been there for 15 or 20 years.

You’ve also said it’s important to grow as quickly as possible – why?

Ultimately, the sector doesn’t want to have multiple registries or numerous standards. It is important to gather market share quite quickly. So you need a very strong business team to build a high market share. When we looked at TZ1 initially, only about seven months ago, they had about two or three million credits on the registry, but now it’s about 40 million. That’s why we like TZ1. In a very positive way, they are aggressively pulling in market share, and that’s important to us.

Does this mean we can expect to see more acquisitions in the coming months?

No, but we’re very open to working with partnerships. We don’t believe we have a monopoly on new ideas. If other companies out there would benefit from working with Markit, then we would love to speak with them. It’s a new and innovative market, so there will be lots of good ideas springing up all over the place, and in that type of very young, fast market, you can work in alliance and partnership, as opposed to the conventional acquisition approach.

You’re in a position to actually go in and help form these new ecosystem markets – is that something we can expect to see?

We will probably not be making the market itself in terms of the type of credits. I don’t see us going into that zone. I don’t see us getting involved in what the standards are or what types of credits are created. However, we are involved in the transparency around the pricing, information, and indexing.

How do you see these markets evolving?

There is no set pattern for a way the market will grow up. However, what we can say is that we will produce financial instruments to help them get to the next level. Environmental markets won’t evolve like any other markets have, but there’s likely to be some commonality. The types of products and processes that we are involved in assist all markets. High-quality data is positive for all markets; premium index-creation is beneficial for all markets; solid trade processing and high-end valuations are useful for all markets regardless of how they grow up. So the things that we’re doing are all pretty much applicable, whichever way the market develops.

For example, no matter how the market grows up, there will be indices, and the question will be exactly what types of indexes are they?

How do you decide when to launch an index?

For an index to become successful, the participants have to trust the underlying data. We will never form an index that isn’t based on data that we don’t consider robust. That’s why we do our indices off exchange data, as you have access to validated prices.

And at what point do you decide that a successful index should become an exchange-traded product?

There’s a perception out there that you just put something on an exchange and it happens, but it’s not like that and all. You need sponsorship, people need to want to trade that contract, and we pride ourselves that our indices always get taken up very well. We’re very open to put indices on an exchange but only if we have the feeling that they will be successful.

There is a core debate about the role of financial instruments in promoting environmental sustainability. Can you summarize your own views in a few sentences?

The whole world has collectively decided that this is a change that’s going to be made globally, and government agencies, corporate and financial entities, charitable trusts, and individuals will all work together to create this major change. The financial markets are also a very important part of that change. The reality is that for the needle to move quickly on climate change, there will have to be a lot of financial penalties and incentives of various sorts – whether that is taxes or credits or subsidies – and the financial markets play a very important role in facilitating that process.

The carbon market is a financial market as opposed to a commodities market, and as such you need a strong financial sector to help it operate, otherwise it will die. A fully-functioning financial market needs transparency, exchanges, trading platforms, valuations and indices and the carbon market is no different.

In this market, you basically have a lot of governments , charitable trusts, NGOs, and other people trying to do the right thing, but there’s no question that if there is commercial gain, it will happen quickly.

Markets in general – and derivatives markets in particular – are on the outs these days. How do you answer the critics?

Financial markets can ‘self-exist’ – and we have to acknowledge that they can become divorced from the underlying change they are supposed to be supporting, but that tends to happen at the very end of a cycle, when the underlying issue has been solved. That’s when markets lose touch with the reason they were created in the first place. With environmental markets, there are real needs right now that the financial markets can help solve. There is so much real work that needs to be completed in the next ten years that environmental markets will not get into this zone – at least not now.

Steve Zwick is Managing Editor of Ecosystem Marketplace. He can be reached at [email protected].

Niall Cameron is responsible for Markit’s index management, KYC and equities businesses including BOAT. He has extensive experience within the financial markets industry, having previously worked at SG Warburg, IBJ International and Merrill Lynch. He joined Markit from ABN AMRO where he headed the bank’s traded markets division. This division encompassed the bank’s trading, sales and research businesses in fixed income, equities and foreign exchange. He holds a BA in Economics from the University of Cambridge.

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