Daily Settlement Transition Overview NGX Power Product Suite
October 2010
Overview – Daily Settlement •
NGX is planning to roll-out a change to the settlement cycle and margining process for its financial power products in Q4 2010
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Key Changes:
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All variation margin (mark-to-market) for financial power products will be cash-settled each business day on a T+2 basis, marked against NGX end-of-day settlement prices
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Invoice amounts will be calculated on based on settlement prices and made available the next morning
Transfer of Positions –
Legacy positions that were transacted prior to the implementation date will be grandfathered under the previous settlement regime
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Those Contracting Parties who wish to transition their positions to the new regime can elect to transfer them, NGX will conduct a matching service to match positions for transfer where possible
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Clients with legacy positions that choose not to transfer them will be able to offset those positions only, no further new positions will be accepted under the former settlement regime. This will be made available through OTC clearing only
Overview – Daily Settlement •
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Margin Account –
A $CAD overnight money market account will be opened for each Contracting Party that will earn interest at TD Bank’s OMMA rate for Canadian funds
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Current rates can be found at https://www.tdcommercialbanking.com/overnight.jsp
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Payments for all daily settlements will be made in and out of this account
Settlement Prices –
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ISO Prices –
Swap amounts will be calculated using applicable ISO prices and current day settlements each day during the notional delivery period
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Calculated amounts will be added to AP/AR throughout the invoice period and invoiced at the end of the month following the current swap invoice schedule
Termination Rights –
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Each night NGX will utilize the settlement prices that it calculates from trade data, extrapolations and market surveys to assess mark-to-market for settlement
Contracting Parties who only hold financial power positions may terminate once those positions are closed and any resulting accounts payable or accounts receivable have been settled
Why Introduce Daily Settlement? •
Power Market Growth –
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Increase in Financial Market Participants –
Through the rise in volumes traded, participation from financial traders (banks, funds, speculators) has increased
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Typically these players are already depositing cash as collateral and are seeking the ability to take gains and pay for losses on an expedited cycle
Better Alignment with Traditional Futures and Swap Markets –
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NGX’s financial power business has more than doubled in the last two years, leading to increased demand for new products and more traditional margining
Daily settlement will allow NGX clients to manage their cash flows in line with the other financial derivatives that they transact and clear in other markets
Efficiency and Risk Reduction –
Movement of funds with daily settlement is much more efficient than current cycle, less stranded capital on deposit pending a monthly settlement date
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Risk is reduced by making positions neutral to the market price each day, particularly in power products where short-term volatility is very high
Mechanics - Invoicing • Daily Invoice –
MTM Settlement Marking all new transactions consummated on the current day to the current day’s settlement price, and all previously transacted forward positions from the previous day’s settlement price to the current settlement price
• Availability
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Invoices will be made available online daily through NGX’s web reporting system
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Invoices will contain summary values and detail is available online to support all calculations
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Settlement of invoices will occur on Business Days, as per the settlement calendar on the NGX website (generally dates that do not fall on a US or Canadian holiday)
What is Settled Each Day? •
T+2 Settlement Cycle –
Invoices for each daily settlement will be made available the morning following the transaction date, and the settlement of each day will be exchanged on the second day following the transaction
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Settlement will occur on business days only and will account for any non-business days that would have otherwise settled on the T+2 cycle
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Positions are marked at the end of each trading session, and swap settlement values are electronically scraped from the AESO or IESO during the night
Settlement Day
MTM Settlement
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Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Sunday
Thursday’s Position
Friday’s Position
Monday’s Position
Tuesday’s Position
Wednesday’s Position
NO SETTLEMENT
NO SETTLEMENT
Mechanics – Cash Settlement Account •
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Segregated TD OMMA –
An interest-bearing overnight money market account will be established for each Contracting Party eligible to transact NGX financial power products
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Contracting Parties will be able to wire funds directly into their NGX daily settlement account and request returns when they choose to do so
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The NGX daily settlement account will not be co-mingled with existing cash collateral accounts
Automatic Settlement –
Contracting Parties will be able to elect to maintain a balance in their daily settlement accounts and instruct NGX to directly transfer funds out of their account to meet invoice obligations
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The intent of automatic settlement is to minimize the day-to-day backoffice work required to reconcile and pay invoices
Contact for Further Information
_____________________ Natural Gas Exchange Inc. Suite 2330, 140 - 4th Avenue SW Calgary, Alberta Canada T2P 3N3 Phone: 403.974.1700 Fax: 403.974.1719 www.ngx.com 8
Dan Zastawny – Vice-President, Markets 403.974.4335,
[email protected] Gary Gault – Vice President 403.974.1707,
[email protected] Shane Casey – Project Manager 403.974.1710,
[email protected]
