FERC Order 741 on Credit Reform Compliance Filing

Transcription

1 FERC Order 741 on Credit Reform Compliance Filing Wording highlighted in yellow reflects key reference points in the development of PJM s proposed Minimum Criteria for Participation. Wording in red font reflects enhancements to PJM s proposed Minimum Criteria for Participation since the last stakeholder discussions. Credit Subcommittee June 6, 2011

2 FERC Order Compliance Filing Timetable October 21, 2010 and February 17, 2011 FERC Order 741 with eight provisions issued October 21, 2011 FERC Order 741-A (rehearing) issued February 17, 2011 December 2010 June 2011 Stakeholder discussions June 30, 2011 Credit Subcommittee: 12/10/10, 1/25/11, 2/22/11, 3/2/11, 3/29/11, 6/6/11 Market Implementation Committee: 3/17/11, 4/12/11 Markets and Reliability Committee: 3/23/11, 4/27/11 Members Committee: 3/31/11, 6/14/11 Compliance filing due October 1, 2011 Effective date of Tariff Revisions 2

3 FERC Order Compliance Filing Topics 1. Shortening the Settlement Cycle 2. Use of Unsecured Credit a) Individual Market Participant Cap b) Aggregate Corporate Family Cap 3. Elimination of Unsecured Credit for Financial Transmission Rights Markets 4. Ability to Offset Market Obligations 5. Use of Material Adverse Change 6. Grace Period to Cure Collateral Posting 7. General Applicability 8. Minimum Criteria for Market Participation 3

4 Order 741 Anticipated Compliance Filing Content Credit Order 741 Provision Settlement Cycle: Billing periods of no more than seven days Settlement periods of no more than seven days after issuance of bills Use of Unsecured Credit: Extension of unsecured credit to no more than $50 million per market participant Extension of unsecured credit to no more than $50 million per corporate family Current PJM Open Access Transmission Tariff and Operating Agreement Provisions Seven-day billing periods Three-day settlement periods after issuance of bills Extension of unsecured credit to no more than $50 million per market participant Extension of unsecured credit to no more than $150 million per corporate family Anticipated Compliance Filing Content Compliant with request for affirmation of approximately 5% of billing amounts included in month-end invoices only Compliant Compliant Reduce unsecured credit in PJM Open Access Transmission Tariff provisions to no more than $50 million per corporate family Elimination of Unsecured Credit for Financial Transmission Rights Markets: Eliminate unsecured credit for FTR positions Unsecured credit not available for meeting FTR credit requirements. Compliant with request for affirmation of completion of transition on unsecured credit for long-term FTRs through May

5 Order 741 Anticipated Compliance Filing Content Credit Order 741 Provision Ability to Offset Market Obligations: Include one of the following options: Establish a central counterparty as discussed above. Require market participants to provide a security interest in their transactions in order to establish collateral requirements based on net exposure. Propose another alternative, which provides the same degree of protection as the two above-mentioned methods. Choose none of the three above alternatives, and instead establish credit requirements for market participants based on their gross obligations. Current PJM Open Access Transmission Tariff and Operating Agreement Provisions PJM Settlement, Inc, a wholly-owned subsidiary of PJM Interconnection, LLC and a FERC-regulated public utility, is the central counterparty to all pool transactions administered by PJM Interconnection, LLC. Anticipated Compliance Filing Content Compliant 5

6 Order 741 Anticipated Compliance Filing Content Credit Order 741 Provision Use of Material Adverse Change : Specify in their tariffs the conditions under which they will request additional collateral due to a material change. This list should not be exhaustive and the tariff provisions should allow the ISOs and RTOs to use their discretion to request additional collateral in response to unusual or unforeseen circumstances. A market participant should receive a written explanation explaining the invocation of the material adverse change clause. Grace Period to Cure Collateral Posting: Allow no more than two days to cure a collateral call. Current PJM Open Access Transmission Tariff and Operating Agreement Provisions PJM s material adverse change provision includes a non-inclusive list of circumstances that may reduce or eliminate a member s unsecured credit limit or lead to a collateral call. Though PJM s practice to date, PJM s Credit Policy does not include a requirement to provide a written explanation for invocation of the material adverse change clause. Collateral calls must be fulfilled within two business days. Anticipated Compliance Filing Content Compliant; anticipate adding (a) significant change in credit default spreads, market capitalization, or other market-based risk measurement criteria, (b) financial default in another ISO/RTO or an organized energy market or exchange, and (c) involuntary revocation of a license or other authority by any Federal or State agency to nonexclusive examples of potential Material Adverse Changes Add requirement that PJM provide a written explanation for invocation of the material adverse change clause. Compliant 6

7 Order 741 Anticipated Compliance Filing Content Credit Order 741 Provision General Applicability: The credit practices in Order 741 will apply to all market participants. Current PJM Open Access Transmission Tariff and Operating Agreement Provisions Two provisions additional factors considered in setting an unsecured credit limit and limited usage of monthly settlements if weekly settlements are inconsistent with applicable state laws or local statutes are applicable only to municipalities. Anticipated Compliance Filing Content Two provisions noted will be expanded to being available to all market participants. 7

8 Minimum Participation Requirements References

9 Credit Risk Management Steering Committee Market Reform (consultant) June 2008 recommendation: PJM should establish minimum criteria for participation in its markets, to be assessed on initial registration. PJM should have a right to verify ongoing compliance with these criteria, at its discretion. Minimum criteria for participation considered: minimum tangible net worth of at least $1 million or guarantee from an affiliate with tangible net worth of $1 million or more; mandatory completion of PJM-provided training and passing associated test on training class content prior to trading in the Financial Transmission Right (FTR) market; and additional considerations that may be applied to municipalities and cooperatives, such as treatment of long-term bond issuances as quasi equity and consideration of the entity s rate-making authority. CRMSC Meeting Vote Support to be Applicable to all Members Support to be Applicable to FTR Market Participants June 12, % --- July 21, % --- September 15, % 9

10 Order 741 Minimum Participation Requirements FERC Order 741 issued October 21, 2011 The Commission has always been wary of unnecessary barriers to entry to market participants, with a goal of ensuring sufficient participation, adequate liquidity, and competitive results. However, this consideration must be balanced with protecting the market from risks posed by under-capitalized participants without adequate risk management procedures in place. Having minimum criteria in place can help minimize the dangers of mutualized defaults posed by inadequately prepared or under-capitalized participants. The Commission is persuaded that each ISO and RTO should include in its tariff language to specify minimum participation criteria to be eligible to participate in the organized wholesale electric market, such as requirements related to adequate capitalization and risk management controls. This will help protect the markets from risks posed by under-capitalized participants or those who do not have adequate risk management procedures in place. Minimum criteria for market participation could include the capability to engage in risk management or hedging or to out-source this capability with periodic compliance verification, to make sure that each market participant has adequate risk management capabilities and adequate capital to engage in trading with minimal risk, and related costs, to the market as a whole. However, the Commission will not specify criteria at this time, and instead directs that each ISO and RTO develop these criteria through their stakeholder processes. Consequently, the Commission directs each ISO and RTO to submit a compliance filing that includes tariff revisions to establish minimum criteria for market participation. Each ISO and RTO will need to consider the minimum criteria that are most applicable to its markets, this compliance filing must be submitted by June 30, 2011 and to take effect by October 1, In taking this approach, the Commission is aware that stakeholder groups with competing interests may disagree on these criteria, and so the Commission will review proposed tariff language to ensure that it is just and reasonable and not unduly discriminatory. The Commission believes that such standards might address adequate capitalization, the ability to respond to ISO/RTO direction and expertise in risk management. The Commission directs that these criteria apply to all market participants rather than only certain participants. The Commission does not agree with the argument that minimum criteria are not necessary if ISOs and RTOs apply vigorous standards in determining the creditworthiness of each market participant. While an analysis of creditworthiness may capture whether the market participant has adequate capital, it may not capture other risks, such as whether the market participant has adequate expertise to transact in an ISO/RTO market. Moreover, the ISOs and RTOs ability to accurately assess a market participant s creditworthiness is not infallible, and this additional safeguard should not be unduly burdensome compared to the need to protect the stability of the organized markets. 10

11 Order 741-A Minimum Participation Requirements FERC Order 741-A (rehearing) issued February 17, 2011 The Commission denies rehearing. In Order No. 741, the Commission deferred to stakeholder processes the determination of reasonable minimum criteria for market participation. Because no market participation criteria have yet to be filed, the Commission cannot determine whether such criteria are or are not reasonable. However, we note that we did not mandate a single set of criteria for all participants in a market, and we see value in Six Cities suggestion that stakeholders consider whether some criteria can be tiered or calibrated based on, for example, the size of a market participant s positions. Such an approach would allow for differentiation based on a market participant s characteristics, but still reduce the market s exposure to the risk of a default. We remind stakeholders that the Commission will review all criteria, including both market-wide criteria and any tiered or calibrated criteria, when such criteria are filed, to ensure that they are just and reasonable and not unduly discriminatory or preferential. While we did indicate that criteria should apply to all market participants rather than only certain participants, our intent was that there be minimum criteria for all market participants and not that all market participants necessarily be held to the same minimum criteria. For some criteria, holding all market participants to the same minimum criteria may be appropriate. For other criteria, however, it may be appropriate to hold different participants to different minimum criteria, e.g., based on the size of the participants positions. 11

12 Minimum Participation Requirements Stakeholder Indicative Votes Support for PJM Proposal Support for Members for Competitive Markets Coalition Proposal Credit Subcommittee (1) 77% 47% Market Implementation Committee (2) 90% 34% Markets and Reliability Committee (3) (1) Seven alternatives considered with one vote per member indicative voting. (2) Five alternatives considered with one vote per member indicative voting. (3) Two alternatives considered with sector indicative voting. 12

13 Dodd-Frank Act Exemption History ISO/RTOs in dialogue with CFTC since January 2011 Data requests Bilateral and Group meetings Met with Commodity Futures Trading Commission (CFTC) Chairman Gensler and Commissioner O Malia April 28 29, 2011, met with: Chairman Gensler and Commissioner O Malia Senior CFTC staff (representing Division of Clearing and Intermediary Oversight, Division of Market Oversight and Office of General Counsel) Positive feedback on obtaining exemption Will be terms and conditions 13

14 Terms of Proposed Dodd-Frank Act Exemption Scope would exempt all ISO/RTO market products, ISO/RTO as an entity, ISO/RTO market participants based on current products in the market today Ringfence: balance evolution of existing products with new products The exemption order would not reach question of jurisdiction over particular products in ISO/RTO markets Conditions: (i) legal basis for set-off (counterparty), (ii) resources and risk management capabilities of participants relative to positions they take, and (iii) information sharing/referrals of anomalies to CFTC staff 14

15 Minimum Participation Requirements PJM Proposal

16 FERC Order Compliance Filing Minimum Criteria for Market Participation Financial Resources Capitalization Requirement Collateral Alternative to Capitalization Requirement Tiered by type of markets in which a member participates FTR specific requirements would not apply to the extent positions cleared through a CFTCregistered Derivatives Clearing Organization (DCO) Capabilities / Certification Training Risk Management Liquidity Adverse changes FTR specific requirements would not apply to the extent positions cleared through a CFTCregistered DCO PJM-provided standard certification and capability topics for all members to be filed as an appendix to the Credit Policy at Attachment Q to the PJM Tariff 16

17 FERC Order Compliance Filing Minimum Criteria for Market Participation Financial Resources: All members or their guarantor must fill one of the alternatives below depending on the markets in which each member transacts. FTR Market Participants Virtual Bidders without FTR Market Transaction Rights Members without FTR Market or Virtual Bidding Transaction Rights Tangible Net Worth * $ 1 million $0.5 million $0.5 million Tangible Assets * $10 million $5 million $5 million Collateral Posting not Available for Fulfillment of Credit Requirements $500,000 and 10% discount on Working Credit Limit $200,000 and 10% discount on Working Credit Limit 10% discount on Working Credit Limit * Must be demonstrated through most recent fiscal year s audited financial statements and may be satisfied by a guarantor if the guaranty exceeds member s credit requirements by $500,000 plus an additional 10%. 17

18 FERC Order Compliance Filing Minimum Criteria for Market Participation Details: ARR credits may be utilized without triggering additional minimum participation requirements Assets or TNW established through cash or equivalent financial assets must be demonstrated as consistent through two most recent annual statements Financial statements used for TNW or asset test must be audited Audited financial statements must reflect the most recent fiscal year Audit does not have to be big four Companies can still transact using collateral alternative 18

19 FERC Order Compliance Filing Minimum Criteria for Market Participation Capabilities Annual Certification by senior officer: 1. The senior officer has signature authority. 2. All employees or agents transacting on behalf of the participant have received appropriate training and are qualified to transact on behalf of the participant. 3. The market participant ( Participant ) has established adequate written risk management procedures applicable to the PJM markets in which it participates. For FTRs, use of industry accepted valuation methodologies, such as Monte Carlo simulations or other analytically based modeling; For FTRs, position valuation and other risk management functions performed independently from trading desk; and For FTRs, use of industry accepted risk controls, such as VAR, position limits, levels of concentration, etc. 4. Participant will request etool transaction deactivation for any markets in which is it not duly prepared to transact. 19

20 FERC Order Compliance Filing Minimum Criteria for Market Participation Capabilities Annual Certification by senior officer (continued): 5. Participant will maintain, external to PJM, sufficient liquidity to pay its PJM invoices and will use such funds to pay its invoices. 6. The Participant has operating procedures in place to effectively and timely communicate with PJM and respond to PJM financial (including credit and billing) communications (during PJM s normal business hours). 7. Lists all known adverse issues that could affect the ability of the Participant to discharge fully its responsibilities in PJM Such as the material adverse changes listed in the PJM Credit Policy 8. Lists any Participant history of bankruptcy or dissolution 9. Certification must be notarized 20

21 FERC Order Compliance Filing Minimum Criteria for Market Participation Transition Plan Assumes FERC order is received by September 30 Effective date of October 1 stipulated in FERC Order 741 October 1 is Saturday; first business day of October is Monday, October 3 PJM will apply provisions the morning of October 3, 2011 Capital requirements/collateral deductibles and discounts applied in ecredit Collateral calls (with 2-day cure period) may be issued if members are short on credit Transaction capability terminated October 3 if compliant original certificates not in hand Next certification due April 30, 2011 and annually by April 30 thereafter Participants with existing FTR positions may let them mature without triggering minimum participation requirements But Participant could no longer transact in the FTR markets Sale of a complete portfolio to another party could still be effected manually Participants wishing to sell/trade individual FTR positions may do so prior to October 1 21

22 Next Steps Members Committee indicative votes on Order 741 compliance filing FERC CFTC June 14, Submit Dodd-Frank Act exemption application --- June 20, 2011 Submit Credit Order 741 compliance filing June 30, Proposed exemption order published in the Federal Register --- Late July day public comment period --- August 2011 Order on Credit Order 741 compliance filing No later than September 30, 2011 Credit policy revisions effective October 1, Final exemption order published in the Federal Register --- October 31,