European Commodity Clearing. one clear connection

Transcription

1 European Commodity Clearing one clear connection

2 European Commodity Clearing one clear connection to commodity markets to an international network of partners to safe business

3 to ECC European Commodity Clearing AG (ECC) is the central European clearing house for energy and other commodities. Currently, ECC provides clearing services for the partner exchanges CEGH Gas Exchange of the Vienna Stock Exchange, European Energy Exchange (EEX), EPEX SPOT, Hungarian Power Exchange, NOREXECO (beginning of 2 nd quarter 2014), POWER EXCHANGE CENTRAL EUROPE and Powernext. ECC is a recognised partner of transmission system operators in many European countries and is linked to the relevant national emission and energy certificate registries. Thus, ECC ensures physical settlement of power, natural gas and emission allowances. Security for Trading Participants In its role as a central counterparty ECC assumes the counterparty risk. In order to guarantee the fulfilment of transactions ECC has implemented a margin system which is compliant with regulatory standards (EMIR, CPSS-IOSCO, CFTC). ECC offers approved collateral management with different options to segregate collaterals. Synergies through Connectivity Working with ECC means that you are connected to Europe s major energy exchanges: One membership provides access to this network. Uniform processes and reports reduce interfaces and create transparency. Costs of clearing for members decrease through Cross-Commodity Margining. Operational Services ECC supports the Trading Participant and is the single point of contact for questions regarding settlement on a 24/7 basis. ECC specialises in the physical settlement of grid-bound energy (power, natural gas) and energy-related products (emission allowances) and is responsible for physical delivery. ECC guarantees financial fulfilment and carries out cash clearing for purchases and sales of all spot market transactions concluded on our partner exchanges, while all payments are netted in order to reduce the cost of clearing. 1

4 to commodity markets ECC connects European commodity markets through integrated and automated clearing processes. One clear connection enables Trading Participants to benefit from a broad network of partners and maximum crosscommodity effects. Pulp (NBSK/BHKP) Recovered Paper (ONP/OMG, OCC) (Futures) NEW in Q2/2014 German Power French Power Austrian Power Swiss Power (Spot) Power Czech Power Slovakian Power Hungarian Power CEGH Czech Natural Gas (Futures) Hungarian Power (Spot & Futures) Emissions Natural Gas Austrian Natural Gas (Spot & Futures) Pulp & Paper Coal French Natural Gas (Spot & Futures) Dutch Natural Gas Futures Belgian Natural Gas Futures NEW in Q2/2014 * Straight-Through Processing (STP) for Trade Registration Phelix Power Futures* Phelix Power Options EEX French Power Futures* Dutch Power Futures* Belgian Power Futures* Guarantees of Origin German Natural Gas (Spot & Futures*) Dutch Natural Gas (Spot) Emissions (Spot & Futures*) USD Coal Futures (ARA and RB)* Romanian Power Futures* Nordic Power Futures* Italian Power Futures* Swiss Power Futures* UK Natural Gas Futures* EUR Coal Futures (ARA and RB)* Spanish Power Futures NEW in Q1/2014 UK Natural Gas Spot NEW in Q2/2014 2

5 one clear connection to an international network of partners 21 Clearing Members ECC provides clearing services for seven partner exchanges and is responsible for the physical settlement of transactions. Therefore, ECC is closely linked to various transmission system operators (20) and registries all over Europe. The clearing process is supported by 21 international clearing NO banks which offer their clearing services 6 to 361 Non-Clearing Members. 1 IE SE 1 FI 2 DK 7 US 3 UK 35 NL 14 BE 3 AE DE LU 2 1 FR SK AT 26 CH 29 SI HU RO 4 IT PT 1 CZ PL 8 r 35 ES BG 1 GR Non-Clearing Members 26 countries Area covered by 20 transmission system operators 3 January 2014

6 to safe business Regulatory Framework ECC is a regulated bank under the German Banking Act and a designated payment system. ECC operates under a clear set of rules that are transparent to clients and customers. ECC has applied for a license under the new European Market Infrastructure Regulation (EMIR). European Regulators International Organisations Germany EU CPSS-IOSCO / CFTC German Central Bank (Bundesbank) Federal Financial Supervisory Authority (BaFin) ESMA Other relevant national regulators EBA College Audits Regulatory reporting Regulatory framework & standards Standards Best practice Licensing & Supervision Recommendations 4

7 to security EMIR implementation impact and ECC solution ECC submitted its application to be recognised as a CCP under the new EMIR regulation on 12 th September The authorisation is expected in the second quarter of Regulatory initiatives, such as the European Markets Infrastructure Regulation (EMIR), are impacting market structures for trading and clearing of derivatives. These regulatory developments require changes to be implemented by market participants. ECC complies with the new regulations as described below. EMIR Requirement Impact on Member ECC Solution Requirements on margining for Exchange Traded Derivatives (ETD) and registered trades Low Margining methodology has been amended and approved by Risk Committee Reporting of trades High Reporting of all trades concluded or registered via partner exchanges to Regis-TR can be delegated to ECC Segregation of client positions and assets High 1) Segregation models for general omnibus, individual omnibus and individual clients 1) depending on the choice of segregation 5

8 to security Risk Management is one of the core functions of ECC For the contracts concluded on ECC s markets or registered on these markets, ECC as central counterparty becomes the buyer to every seller and the seller to every buyer. When a transaction is concluded or registered on ECC s derivatives markets two identical transactions are created between ECC and the Clearing Member and between the Clearing Member and its Non-Clearing Member. For all transactions on the spot markets a transaction between ECC and the Trading Participant is created. In these transactions, the Clearing Members act as guarantors for their Non-Clearing Members (the Trading Participants). Managing risk is an essential function of ECC. ECC s capability to effectively manage risks is based on various lines of defence: ECC Other Financial Resources Default Fund ECC Dedicated Own Resources Clearing Member Margins Clearing Member Admission Criteria The main element of ECC s Risk Management is that exposures are collateralised with highly liquid financial instruments or cash with minimal credit risk at all times. 6

9 to security ECC collects margins on a daily basis to limit its credit exposures from its Clearing Members. Such margins are sufficient to cover losses that result from at least 99 % of the exposure s movements over a time horizon of two trading days. On its derivatives markets, ECC uses the SPAN 1) methodology and an in-house model for the spot markets. Margin Types Exposure Type Current Exposure Potential Future Exposure Margin Type Variation Margin Premium Margin Current Exposure Spot Market SPAN 1) Initial Margin 2) Initial Margin Spot Market Delivery Margin Description Mark-to-market value (change) of all open positions in futures using the latest market prices received from the markets. ECC s options are Premium Style (i.e. no daily Variation Margin is calculated). Therefore, the Premium Margin has to be deposited for net short positions. For net long positions credits from Premium Margin are used to offset other margin requirements. The net value (payment amount) of all transactions concluded on natural gas and power spot markets during the day that have not been settled and the margin for EUA. The SPAN Initial Margin covers the risk in open positions in futures and options. The Spot Initial Margin is an additional buffer which is designed to cover exposure from potential spot transactions in the future. The Delivery Margin covers the risk in positions of physically settled futures during the delivery period. as of November ) SPAN is a registered trademark of Chicago Mercantile Exchange Inc. Chicago Mercantile Exchange Inc. assumes no liability in connection with the use of SPAN by any person or entity 2) Additionally the Supplementary Initial Margin (MCAP) covers the difference between the minimum of an 80 % margin requirement (as required by EMIR) and the current margin reduction if the latter is higher. 7

10 to security Margining at ECC As a central counterparty, ECC assumes the counterparty risk for all transactions concluded at its partner exchanges. In the event of a default, ECC guarantees payment and delivery (ECC covers the settlement risk). Managing the counterparty risk is an essential part of ECC s business. ECC calls margins for every open position. In order to reflect the diversified risk in large portfolios ECC recognises spreads between different products which reduce the margin requirement. The Spot Margin and SPAN Initial Margin constitute the two main margin types at ECC. Spot Margin On spot markets, trading and clearing takes place 24/7 including times when settlement of payments is not possible due to TARGET II closure. ECC measures credit exposure on spot markets near to real time on a 24/7 basis using the Current Exposure Spot Market (CESM). This margin has to be covered with collateral at all times. In order to avoid frequent margin calls due to collateral shortfalls and to cover exposures that might arise from trading activities during TARGET II closure times ECC has developed a bespoke model to calculate the Initial Margin Spot Market (IMSM). This margin is a buffer which is designed to cover exposure from potential spot transactions in the future. The models consider correlation effects between the different products that are cleared by ECC to realise portfolio effects which increase the collateral efficiency. 8

11 to security SPAN Initial Margin ECC calculates portfolio-based margin requirements using the industry standard SPAN. The methodology allows ECC to optimally align margin requirements with risk, thereby realising efficient margining. ECC updates the SPAN risk parameters daily, they are available on ECC s homepage for downloading. Extensive Set of Inter-Commodity Margin Credits Margin credits are calculated for any combination of opposite positions for different products according to the correlation between the two products and on different levels of netting. Maximised collateral efficiency and improved economies of scale can be achieved in diversified portfolios. Netting Perfect Spreads Inter-Commodity Spreads Inter Member Margin Cap Offsetting of futures and options with the same underlying Margin Credits 100 % Spreads between opposite positions in the same commodity and with a completely overlapping delivery period and profile, e.g.: Year vs. four quarters Baseload vs. Peakload and Off-Peak Spreads between any potential combination of different products: Commodities Delivery area Delivery profile Delivery period ECC calculates margins on a gross basis across members. If the overall margin reduction (level 1 3) is higher than 80 %, the delta has to be covered through an additional contribution to the CM s Clearing Fund Margin Credits 99 % Margin Credits 0 99 % Margin Credit 0 9

12 to security Segregation of Collateral (starting Q2/2014) ESMA stated that individual client asset segregation requires the segregation and portability of the client s actual assets. Segregation means, that assets or positions are held in separate records and accounts that enable ECC to distinguish the assets and positions held for one Clearing Member (CM), Non-Clearing Member (NCM) or client from the assets and positions held for another CM, NCM or client without delay. The principle of segregation is that protection is offered for positions and collateral held by an NCM against claims arising out of the potential default of the CM or any of its NCMs. Benefit Collateral of the NCM is fully protected if individually segregated. Positions can be transferred faster (accelerated Clearing Member Change). In case of a Clearing Member Change, the NCM collateral can be transferred directly with the positions, assuming a prior agreement with the existing CM. Segregation of collateral can reduce the CM s costs of liquidity. Type of segregation General Omnibus (GOS) Individual Segregation (IS) 1) Omnibus Segregation (OS) 1) Position CM Proprietary 3) CM Agency NCM NCM NCM Collateral CM Proprietary Pool 3) Standard Collateral Pool IS Collateral Pool OS Collateral Pool 2) 2) 1) IS and OS are optional. NCM s have to apply for this setup. 2) Shortfalls in individual collateral pools are covered by the Standard Collateral Pool. 3) CM has the option to set up a separate collateral pool for its proprietary business. 10

13 to security Trade Reporting according EMIR Article 9 From 12 th February 2014, any counterparty will have to report derivatives transactions to a trade repository according to EMIR Article 9. ECC is implementing a solution where customers can delegate their reporting to ECC fulfilling certain prerequisites. This means that for exchange trades and registered trades ECC s members can reduce their reporting efforts. Reporting for Derivatives Transactions All contracts that constitute derivatives under EMIR are reportable according to Art. 9. Due to the principal-to-principal model, the Clearing Member (CM) concludes a transaction with ECC as well as, in the case of Non-Clearing Member (NCM) or client business, a back-to-back transaction with its NCM or client. Thus, for any derivatives transaction up to four trades with separate Unique Trade Identifiers (UTI) are reportable by the respective counterparties. ECC UTI 1 Clearing Member UTI 2 Non-Clearing Member / Client Transaction Reference Number 1 Requirements for Trade Reporting via ECC Clearing Member may delegate reporting to ECC (Delegated Reporting) CM has to sign an agreement with ECC Open account with Regis-TR (full reporting participant membership) Trading Participants may delegate reporting to ECC (Third-Party Reporting) Affiliated CM has delegated his reporting to ECC Open account with Regis-TR (full reporting participant membership) Sign an agreement with ECC and provide certain static data Service fee of 200 per month for each party 11

14 to integrated processes Operations ECC has established integrated processes and highly efficient operations for clearing and settlement of energy and other commodities. Its range of services comprises physical settlement, financial settlement and invoicing for transactions in power, natural gas, emission allowances, coal and pulp/paper. ECC Operations Order book trading and Trade Registration Physical settlement (delivery) Financial settlement (payment) Invoicing Members connected to ECC benefit from standardised procedures and straight-through processes. This set-up and ECC s network of partners are suitable for enhancing existing partnerships and potential future relations. Payment, margining and delivery netting are major benefits of ECC s connective structure. 12

15 to integrated processes Physical Settlement 24 hours, 7 days a week ECC has a high level of expertise in the physical settlement of grid-bound energy (power, natural gas) and energyrelated products (emission allowances). ECC is responsible for the physical settlement of traded or registered contracts. For this reason, ECC has concluded contracts with 20 European transmission system operators (TSOs) for both power and natural gas. Nomination includes scheduling of the local markets of ECC s partner exchanges and the nomination of cross-border power transmissions as part of European market coupling projects. In this context, ECC assumes the role of the central counterparty, thus contributing to the further integration of the European electricity markets. Furthermore, ECC is linked to the Union Registry to perform the delivery of emission allowances as well as to the Registry Grexel Finland in order to perform the delivery of Guarantees of Origin (GoO). ECC Physical Settlement Power Intraday (DE, AT, FR, CH) Day-Ahead (DE, AT, FR, CH, HU) Physical Futures (FR, NL, BE, HU, SK) Guarantees of Origin Natural Gas Within-Day (DE, AT, FR, NL) Day-Ahead (DE, AT, FR, NL) Physical Futures (DE, AT, FR, NL, UK, CZ) Emission Allowances EUA Spot EUA Auction EUA Futures CER Futures CER Spot EUAA Spot EUAA Auction EUAA Futures ERU Futures 13

16 to integrated processes Financial Settlement As a central counterparty, ECC guarantees financial fulfilment and carries out cash clearing for purchases and sales of all transactions concluded on ECC s partner exchanges. ECC co-operates with international banks as Clearing Members. For Euro settlement ECC uses central bank money that is transferred via the robust and reliable TARGET 2 infrastructure. ECC has been approved as a designated payment system according to Article 10 of the Settlement Finality Directive 98/26/EC. Payments in foreign currencies are settled with the help of Clearstream Banking Luxemburg (Clearstream) as a private settlement agent. ECC has a harmonised invoicing and fee settlement process across all of its products and markets. 14

17 for you Access to ECC In its function as a central counterparty, ECC offers its participants a variety of clearing and settlement services. ECC provides you with one clear connection to its whole network of partner exchanges and products. There are two different types of membership in ECC representing two levels of access: Become Trading Participants of the exchange Payment agent Guarantor CM Clearing Members (CM): are financial institutions in an EU member state or in Switzerland. hold either a general clearing license or a direct clearing license. can be Trading Participants of the exchange. Find a CM and conclude an agreement Conclude a balance group agreement NCM ECC Trilateral NCM agreement Non-Clearing Members (NCM): are Trading Participants of the exchange. sign a trilateral agreement between the Non- Clearing Member, Clearing Member and ECC to provide for the necessary infrastructure. Responsible for physical nomination Performs margining, financial and physical settlement through the ECC infrastructure 15

18 to Straight-Through Processing for Trade Registration Through its partner exchanges ECC offers straight-through processing for registered transaction (EFP Exchange for Physical) As a central counterparty, ECC offers interfaces for the automated registration of transactions in products listed at ECC s partner exchanges, in addition to the possibility at ECC s partner exchanges to register transactions for clearing. With the EFETnet Clearing Registration Service (exrp) or Trayport s Clearing Link one single electronic portal can be used for trade registration, monitoring all trade registrations in real time and supporting the reconciliation of cleared positions. Additionally, the final beneficiary of the broker-registered trade has the choice of automation of trade acceptance. Trade Registration Straight-Through Processing (STP) Manual EFETnet Clearing Registration Service (exrp) Trayport s Clearing Link Exchange system Registration at partner exchange for clearing at ECC Straight-Through Processing (STP) Straight-Through Processing reduces operational risks for the market participants. ECC provides an interface for submitting registered trades to clearing. It shortens the time between trade registration and clearing confirmation. Trades submitted through this channel are subject to the approved clearing process of ECC. 16

19 to Straight-Through Processing for Trade Registration How to apply for the Straight-Through Process (STP) for Trade Registration Member A Trade Member B The application for STP Process requires an existing NCM Agreement as well as a Trading Participant Membership that covers the respective products. 1 Sign up for Trade Registration using ECC forms (T07 / T08/T09) As a broker, please fill in the T09 form if you want to automatically register trades through the STP infrastructure. As a Trading Participant, please fill in the T07 / T08 forms if you want to specify the conditions under which trades are automatically confirmed on a per-broker basis. 2 Get connected to the external infrastructure Please contact the respective counterparty: EFETnet, Trayport, ECC s partner exchange or a broker and get connected to the selected solution. 3 Register trades for clearing through a partner exchange The external infrastructure registers the trade in the account of the respective broker or directly in the account of the Trading Participant. At this stage, a range of different steps is taken to verify the correctness of the trade in terms of product code, maturities, limits and Trade Registration price ranges. Depending on the setting for the broker, the STP interface will then automatically trigger a confirmation for the Trading Participant. Confirmation Confirmation Confirmation Auto Confirmation (T07 / 08) Broker EFETnet Trayport Partner Exchange Auto Registration (T09) ECC Registration for clearing Registration for clearing at partner exchange Auto Confirmation (T07 / 08) NEW ECC plans to switch from an opt-in model to an opt-out model for auto confirmation of screen-based trades in Q2/2014. Each Trading Participant has to proactively declare towards ECC whether the auto confirmation of such trades should be deactivated. 17 NCM A CM A NCM B CM B Straight-Through Process (STP)

20 Contact: European Commodity Clearing AG Augustusplatz Leipzig Germany Phone: clearing@ecc.de As of January 2014