Settlement Pricing Procedure

Transcription

1 Settlement Pricing Procedure The English version is for informal use only. Only the german version is legally binding Leipzig Version 4.07

2 1. Table of Contents 1. Table of Contents 2 2. Preliminary Remarks 3 3. Settlement Prices for Futures, Options and Spot Instruments Definition of Product-Specific Parameters Calculation of Theoretical Settlement Prices Calculation examples Product-Specific Rules and Parameters for the Determination of Settlement Prices Settlement of financial Power Futures Settlement of financial Cap and Floor Futures Settlement of financial Windpower Futures Settlement of Futures and Spot Instruments on Emission Allowances Settlement of financial Coal Futures Settlement of financial Freight, Iron Ore and Fertilizer Futures Settlement of Options on Power Futures Settlement of Options on Freight Futures Settlement of Options on EUA Dec Futures Settlement of Futures on Guarantees of Origin Settlement of financial Futures on Agricultural Products Settlement of financial Wood Pellets Futures 26 Settlement Pricing Procedure Page 2

3 2. Preliminary Remarks On every exchange trading day, a settlement price is established for each individual product traded continuously or eligible for Trade Registration on the EEX Derivatives and Spot Markets. The settlement price is relevant for the execution of all clearing processes and, specifically, for the calculation of each trading participant s Variation Margin. The settlement price is established on all exchange trading days. In this context, the order book situation during the settlement window is decisive for pricing. If the settlement price cannot be established on this basis, other price sources (e.g. Index provider) or the estimates by the trading participants chief traders are used for pricing. This approach is also used to calculate certain indices. The exact calculation rules for these indices are specified in separate index descriptions. For options and products approved for Trade Registration a different approach is used. This document outlines the procedure for the daily determination of the EEX Derivatives Markets settlement prices and for continuous trading on the EEX Spot Markets. Settlement Pricing Procedure Page 3

4 3. Settlement Prices for Futures, Options and Spot Instruments 3.1 Definition of Product-Specific Parameters In principle the order book situation is used as the basis for settlement pricing. Only trades and orders which fulfil product/contract-specific parameters are used for pricing. These parameters include: Beginning and duration of the settlement window Minimum number of contracts for the consideration of trades and best bid/best ask Minimum duration of the cumulated valid best bid/best ask during the settlement window Weighting between trades and mean values from average best bid/best ask Maximum settlement spread per contract for consideration for settlement The settlement window is defined as the period of time during the trading phase, in which the trade and order book situation relevant for the settlement price determination is tracked. The price range between buy and sell prices which is specified as a maximum value per contract is defined as the settlement spread. The respective settlement spread to be applied depends on the current market situation. This means that one settlement spread each is defined per contract, for the normal and fast market situations and is specified in a separate annex to this document on contract level. Settlement Pricing Procedure Page 4

5 3.2 Calculation of Theoretical Settlement Prices Firstly, the theoretical settlement prices are determined on the basis of defined calculation algorithms. In this context, the underlying method depends on the number of valid trades and orders which fulfil the product-specific preconditions (see 3.1 and 4). In principle, the price sources are trades, orders and data of other price sources or the chief trader procedure which have to be weighed in descending priority. EEX reserves the right to depart from this prioritization in case the thus determined theoretical settlement price reflects the actual market conditions more precisely. Mistrades or trades cancelled ex officio are not considered. EEX reserves the right to exclude individual trades or orders from pricing if these are not in line with the actual situation on the market. The following overview provides examples of possible scenarios and the calculation algorithms connected with these: Order book situation There was at least one trade. There were orders. Calculation algorithm Theoretical settlement price = 0.75*AverageTradePrice *AverageMid There was at least one trade. There were no orders. Theoretical settlement price = AverageTradePrice There was no trade. There were orders. Theoretical settlement price = AverageMid There was no trade. There were no orders. The theoretical settlement price can be established based on data of other price sources or the chief trader procedure. In addition product-specific indications specified in section 4 have to be considered. The AverageTradePrice is established as the mean value of the exchange prices traded during the settlement price window. The AverageMid is calculated as the mean value of the average best bid and the average best ask. The average best bid (the average best ask) is established as the average from all highest buy orders (lowest sell orders) which lie within the limits of the current settlement spread during the time window for the individual contract during this period on the market. If there are no trades and orders fulfilling the product-specific parameters, the EEX Management Board can determine the settlement price based on data of other prices sources or the chief trader procedure. Every trading participant can take part in the chief trader procedure through representation by a licensed exchange trader (chief trader). The EEX Market Supervision Department provides a standardised form to all trading participants, who agree to provide a market price for the respective Derivatives Market contracts or Spot instruments. If required, EEX determines the settlement prices by calculating the simple average from all estimates of the market prices received (indications). EEX reserves the right to remove indications which deviate considerably from the average in the calculation. There is no order book trading in products for Trade registration. As a result, trades and orders cannot be determined. In this case, prices are established with the help of data of other price sources or the chief trader procedure. Settlement Pricing Procedure Page 5

6 EEX reserves the right to adjust the theoretical settlement prices established in advance in order to ensure freedom from arbitrage (see 3.3). In case of Derivatives contracts without an Open Interest, EEX reserves the right to waive the determination of settlement prices. In this case, the minimum price is determined pro forma as the settlement price and is defined in the contract specifications. The calculation of prices for Options is based on the mathematical equation of the Black-76 model. The essential influencing parameters comprise the underlying futures price, the exercise price, the residual term, the short-term risk-free interest rate and the implied volatility of the underlying security. In this context, the implied volatility is established by EEX based on data of other price sources or using the chief trader procedure and with the help of historic market prices. Subject to the assumption of the standardised normal distribution, the theoretical option prices are established in accordance with the following equation: with with c p F X T r c = e rt [ F N (d 1 ) X N (d 2 )] p = e rt [X N( d 2 ) F N ( d 1 )] d 1 = ln (F X ) + σ2 T 2 σ T d 2 = ln (F X ) σ2 T 2 σ T = price of the call option = price of the put option = d 1 σ T = current futures price (of the underlying security), here: settlement price = exercise price = residual term of the option = short-term risk-free interest rate (from Reuters). This is the interbank interest rate, at which banks of good credit standing lend each other money. N (x) = cumulative standardised normal distribution at point x, i.e. N (x) indicates the likelihood for a variable to be subject to a standard normal distribution of being smaller than x or equal x ln ( ) = natural logarithm = expected annual volatility of the futures price (of the underlying security) Except for the volatility, the input parameters are known and can be retrieved from various databases. The calculation of prices for Options on Freight Futures is based on the mathematical equation of the Turnbull and Wakeman formula extended by Espen Gaarder Haug. The essential influencing parameters comprise the underlying futures price, the exercise price, the time to maturity, the start of the averaging period, the short-term risk-free interest rate and the implied volatility of the underlying asset. In this context, the implied volatility is established by EEX based on data provided by Cleartrade. Subject to the assumption of the standardised normal distribution, the theoretical option prices are established in accordance with the following equation: c A = e rt [ F N (d 1 ) X N (d 2 )] p A = e rt [X N( d 2 ) F N ( d 1 )] with Settlement Pricing Procedure Page 6

7 d 1 = ln (F X ) + σ A 2 T 2 A T d 2 = d 1 σ A T where ln (M) σ A = T M = 2eσ2T 2e σ2τ [1 + σ 2 (T τ)] σ 4 (T τ) 2 c A = price of the call option with volatility of the average on the futures A p A F X T τ r = price of the put option with volatility of the average on the futures A = current futures price (of the underlying asset), here: settlement price = exercise price = Time to maturity = Time to the beginning of the average period = short-term risk-free interest rate (from Reuters). This is the interbank interest rate, at which banks of good credit standing lend each other money. N (x) = cumulative standardised normal distribution at point x, i.e. N (x) indicates the likelihood for a variable to be subject to a standard normal distribution of being smaller than x or equal x ln ( ) = natural logarithm = expected annual volatility of the futures price (of the underlying asset) If the option is into the average period the strike price must be replaced by Y and the option value must be multiplied by T T 2, where Y = X T 2 T F (T 2 T) A T 2 T 2 F A = the original time in the average period = the average futures price during the realized or observed time period T 2 T. During the average periode F A will be assumed to be equal to F. Settlement Pricing Procedure Page 7

8 Compliance with the Principle of Freedom from Arbitrage in the Determination of Settlement Prices If the settlement prices are determined in accordance with the order book situation, or based data of other price sources or the chief trader procedure, theoretical settlement prices are established first. These are then adjusted as a next step to determine arbitrage-free settlement prices. These arbitrage-free prices are then determined as settlement prices. In the case of derivatives contracts, the following scenarios are possible: - Arbitrage between quarter and year contracts - Arbitrage between quarter and season contracts - Arbitrage between month and quarter contracts - Arbitrage between day and week contracts - Arbitrage between day and weekend contracts These scenarios can also be fulfilled simultaneously, as the following example chart shows. In this example, the principle of freedom from arbitrage is fulfilled under the following conditions: Y 17 = (Q1 17 *hq Q2 17 *hq Q3 17 *hq Q4 17 *hq4 17 ) / (hq hq hq hq4 17 ) and Q2 17 = (M4 17 *hm M5 17 *hm M6 17 *hm6 17 ) / (hm hm hm6 17 ) In the case of the season contracts in this example, the following conditions have to be fulfilled: and Y 17 = (Q1 17 *hq S Summer17 *hs Summer17 + Q4 17 *hq4 17 ) / (hq hs Summer17 + hq4 17 ) S Winter16/17 = (Q4 16 *hq Q1 17 *hq1 17 ) / (hq hq1 17 ) S Summer17 = (Q2 17 *hq Q3 17 *hq3 17 ) / (hq hq3 17 ) S Winter17/18 = (Q4 17 *hq Q1 18 *hq1 18 ) / (hq hq1 18 ) Settlement Pricing Procedure Page 8

9 as well as Q2 17 = (M4 17 *hm M5 17 *hm M6 17 *hm6 17 ) / (hm hm hm6 17 ) Legend: Y = Theoretical settlement price of a year contract S = Theoretical settlement price of a season contract Q = Theoretical settlement price of a quarter contract M = Theoretical settlement price of a month contract h = Contract volume Freedom from arbitrage is ensured if there is a difference of EUR/GBP/USD 0.00 between the contracts with overlapping maturities after commercial rounding. In this context, on principle, prices resulting from trades and/or orders are adjusted to a lower degree than prices established based on data of other price sources or the chief trader procedure. Settlement Pricing Procedure Page 9

10 3.3 Calculation examples The determination of settlement prices are illustrated below on the basis of the example of an order book. The four possible scenarios (see section 3.2) are illustrated using the contracts F1BM Aug17, F1BM Sep17, F1BM Oct17 and F1BM Nov17. a) Determination of the theoretical settlement price for the F1BM Aug17 contract During the settlement window (in this case: 15:50 to 16:00), there is the following order book scenario in a normal market situation. There is a settlement spread of EUR Order book during the settlement window F1BM Aug17 Time Best Bid Best Ask Spread between Best Bid / Best Ask 15:50 15 MW MW Trade 15:51 3 MW :51 12 MW MW :53 10 MW :53 20 MW :58 20 MW :58 12 MW MW Initially, the best bid and/or best ask and the prices traded which do not fulfil the requirements for the determination of settlement prices have to be eliminated from the calculation. In this example, these cases are shown with a grey background. In the first case, the trade does not fulfil the minimum number of contracts of 5 MW. In the second case, there is no best ask, as a result of which, the best bid cannot be included in the pricing. In the third case, the spread between the opposite best bid and best ask exceeds the settlement spread of EUR The theoretical settlement price is established on the basis of the remaining best bid/best ask and the prices traded. Since both, trades and orders have to be taken into account, the prices are established in accordance with the following equation: Theoretical settlement price = 0.75*AverageTradePrice *AverageMid. It amounts to EUR Determination of the theoretical settlement price for F1BM Aug17 Calculation Result Weighting Traded prices =( )/ % Average best bid =( )/ Average best ask =(52+52)/ =( )/ % Settlement Pricing Procedure Page 10

11 Theoretical Settlement price =(51.88*0.75)+(51.81*0.25) b) Determination of the theoretical settlement price for the F1BM Sep17 contract During the settlement window, there is the following order book situation during a normal market situation. A settlement spread of EUR 2.00 applies. Order book during the settlement window - F1BM Sep17 Time Best bid Best ask Spread between best bid / best ask 15:50 15 MW MW Trade 15:50 3 MW :51 12 MW MW :53 10 MW Initially, the best bid and/or best ask and the prices traded which do not fulfil the requirements for the determination of settlement prices again have to be eliminated from the calculation. In this example, these cases are shown with a grey background. The trade does not fulfil the minimum number of contracts of 5 MW. The cumulated best bid/best ask do not fulfil the minimum duration of 3 minutes and, as a result, they also have to be eliminated. As only one trade has to be taken into account, the price is established in accordance with the following equation: Theoretical settlement price = AverageTradePrice. This amounts to EUR Determination of the theoretical settlement price for F1BM Sep17 Calculation Result Weighting Traded prices % Theoretical settlement price c) Determination of the theoretical settlement price for the F1BM Oct17 contract During the settlement window, there is the following order book situation during a normal market situation. A settlement spread of EUR 2.00 applies. Order book during the settlement window - F1BM Oct17 Time Best bid Best ask Spread between best bid / best ask 15:50 15 MW MW Trade 15:53 3 MW Settlement Pricing Procedure Page 11

12 15:55 12 MW MW Again, the best bid and/or best ask and the prices traded, which do not fulfil the requirements for the determination of settlement prices, have to be eliminated from the calculation (shown with a grey background). In this case, the trade does not fulfil the minimum number of contracts traded of 5 MW. The available best bid/best ask fulfil the preconditions, as a result of which, the theoretical settlement price is determined as follows: Theoretical settlement price = AverageMid. This is EUR Determination of the theoretical settlement price for the F1BM Oct17 Calculation Result Weighting Average Best Bid =( )/ Average Best Ask =( )/ =( )/ % Theoretical settlement price Settlement Pricing Procedure Page 12

13 d) Determination of the theoretical settlement price for the F1BM Nov17 contract During the settlement window, there is the following order book scenario during a normal market situation. A settlement spread of EUR 2.00 applies. Order book in the settlement window - F1BM Nov17 Time Best bid Best ask Spread between best bid / best ask 15:50 2 MW MW Trade 15:58 2 MW :58 3 MW In this case, pricing on the basis of the order book is not possible, as there are no best bid/best ask or prices traded which fulfil the requirements described above. In addition no external price sources are available. As described in section 3.2, the theoretical settlement price can be established based on data of other price sources or the chief trader procedure. If the chief trader procedure applies, the theoretical settlement price is determined as follows: The following fair values were reported from chief traders: Participant Fair Value Participant Participant Participant Participant Participant The arithmetic mean is determined from the fair values. As a result, the theoretical settlement price for the F1BM Nov17 contract is EUR 50. Determination of the theoretical settlement price for F1BM Nov17 Calculation Result Weighting Fair Values =( )/ % Theoretical settlement price Settlement Pricing Procedure Page 13

14 4. Product-Specific Rules and Parameters for the Determination of Settlement Prices 4.1 Settlement of financial Power Futures Important aspects Settlement window Dutch and Belgian Power Futures Other Power Futures Minimum number of contracts traded Year contracts All other contracts Minimum number of contracts per order Year contracts All other contracts Settlement spread for the consideration of best bid / best ask Minimum duration of the cumulated valid best bid/best ask during the settlement window PXE Power Futures All other Futures Other notes Specification 15:45 16:00 CET 15:50 16:00 CET 3 contracts = 3 MW 5 contracts = 5 MW 3 contracts = 3 MW 5 contracts = 5 MW These are specified on contract level in a separate annex to this document. 1 min = 60 sec 3 min = 180 sec The settlement prices (P) of the Off-Peak Futures result from the arbitrage-free, calculated settlement prices of the corresponding Base and Peak Futures. In this case, the Off-Peak Futures are based on the following algorithm: P Off-Peak = (P Base*h Base-P Peak*h Peak)/h Off-Peak The settlement price of the front month is calculated as an average of the settlement prices or final settlement prices of the respective day- and/or week futures. The final settlement price for the current delivery week and/or the current delivery month in Power Futures is established as the mean value of the underlying Spot Market Index for the respective week and/or the respective month. The final settlement price of a day future corresponds to the respective average of the hourly price, calculated by the most liquid spot exchange in the daily Day-Ahead auction. This settlement price might be negative. The final settlement price of a Weekend Future corresponds to the respective average of the two corresponding day futures. This settlement prices might be negative. In deviation to the procedure described above, the daily settlement prices for Phelix-DE/AT, Phelix-DE and Phelix-AT Futures with delivery periods before separate Day-Ahead Auctions for the Settlement Pricing Procedure Page 14

15 market areas Austria and Germany have been implemented at EPEX Spot (expected as of October 2018) are equal, whereas the most liquid market is decisive. For delivery periods after separate Day-Ahead Auctions for the market areas Austria and Germany have been implemented at EPEX Spot (expected as of October 2018) the settlement prices of Phelix-DE/AT (SP DE/AT ), Phelix-DE (SP DE ) and Phelix-AT (SP AT ) Futures are determined according to the following the ratio: SP DE/AT = 1 10 (9SP DE + SP AT ), whereas the most liquid markets are decisive. For all other contracts, that are not final settled and the theoretical settlement price is negative, the minimum price of 0.01 EUR/MWh or 0.01 GBP/MWh applies. The final settlement price is defined in the contract specifications. For the Spanish Power Futures the following applies: EEX and OMIP (Operador do Mercado Ibérico de Energia) have both listed the above named products on each exchange (cross listing). Hence, EEX can also make use of the published settlement prices by OMIP in order to determine the daily settlement prices for the products listed at EEX. Settlement Pricing Procedure Page 15

16 4.2 Settlement of financial Cap and Floor Futures Important aspects Settlement window Minimum number of contracts traded Minimum number of contracts per order Settlement spread for the consideration of best bid / best ask Minimum duration of the cumulated valid best bid/best ask during the settlement window Other notes Specification 15:50 16:00 CET 5 contracts = 5 MW 5 contracts = 5 MW These are specified on contract level in a separate annex to this document. 3 min = 180 sec The final settlement price is defined in the contract specifications. Settlement Pricing Procedure Page 16

17 4.3 Settlement of financial Windpower Futures Important aspects Settlement window Minimum number of contracts traded All contracts except quarters and years Quarter and year contracts Minimum number of contracts per order All contracts except quarters and years Quarter and year contracts Settlement spread for the consideration of best bid / best ask Minimum duration of the cumulated valid best bid/best ask during the settlement window Other notes Specification 10:00 16:00 CET 2 contracts 1 contract 2 contracts 1 contract These are specified on contract level in a separate annex to this contract. 3 min = 180 sec The final settlement price is defined in the contract specifications. Settlement Pricing Procedure Page 17

18 4.4 Settlement of Futures and Spot Instruments on Emission Allowances Important aspects Specification Settlement window 17:50 18:00 CET Minimum number of contracts traded 3 contracts = t CO 2 equivalent Minimum number of contracts per order 3 contracts = t CO 2 equivalent Settlement spread for the consideration of best bid/best ask These are specified on contract level in a separate annex to this contract. Minimum duration of the cumulated valid best 3 Min = 180 sec. bid/best ask during the settlement window Other notes - Settlement Pricing Procedure Page 18

19 4.5 Settlement of financial Coal Futures Important aspects Settlement window Minimum number of contracts traded Minimum number of contracts per order Settlement spread for the consideration of best bid/best ask Minimum duration of the cumulated valid best bid/best ask during the settlement window Other notes Specification 15:50 16:00 CET 5 contracts = 5,000 t 5 contracts = 5,000 t These are specified on contract level in a separate annex to this contract. 3 min. = 180 sec. The final settlement price is defined in the contract specifications. Settlement Pricing Procedure Page 19

20 4.6 Settlement of financial Freight and Iron Ore Futures Important aspects Specification Settlement window - Minimum number of contracts traded - Minimum number of contracts per order - Settlement spread for the consideration of best - bid/best ask Minimum duration of the cumulated valid best - bid/best ask during the settlement window Other notes EEX and Cleartrade (CLTX) have both listed the above named products on each exchange (cross listing). Cleartrade will be responsible for the determination of the daily settlement prices according to their settlement price determination procedure for the products listed at EEX. The final settlement price is defined in the contract specifications. Settlement Pricing Procedure Page 20

21 4.7 Settlement of Options on Power Futures Important aspects Specification Settlement window - Minimum number of contracts traded - Minimum number of contracts per order - Settlement spread for the consideration of best - bid/best ask Minimum duration of the cumulated valid best - bid/best ask during the settlement window Other notes The exchange establishes the intraday market value for the underlying security (Intraday Fixing price) as of 14:00 CET on the last day of trading. Options not exercised expire at 15:00 CET on the last day of trading. Settlement Pricing Procedure Page 21

22 4.8 Settlement of Options on Freight Futures Important aspects Specification Settlement window - Volume weighting of trades - Minimum number of contracts per order - Settlement spread for the consideration of best - bid/best ask Minimum duration of the cumulated valid best - bid/best ask during the settlement window Other notes The exchange establishes the intraday market value for the underlying security (Intraday Fixing price) as of 18:00 CET on the last day of trading. Options not exercised expire at 18:45 CET on the last day of trading. Settlement Pricing Procedure Page 22

23 4.9 Settlement of Options on EUA Dec Futures Important aspects Specification Settlement window - Minimum number of contracts traded - Minimum number of contracts per order - Settlement spread for the consideration of best - bid/best ask Minimum duration of the cumulated valid best - bid/best ask during the settlement window Other notes The exchange establishes the end of day market value for the underlying security (settlement price) during the settlement price window between 5:50 pm CET and 6:00 pm CET on the last trading day. Options not exercised expire at 6:45 pm CET on the last trading day. Settlement Pricing Procedure Page 23

24 4.10 Settlement of Futures on Guarantees of Origin Important aspects Specification Settlement window 13:00 16:00 CET (on trading days) Minimum number of contracts traded 2 contracts = 2,000 GoOs Minimum number of contracts per order 2 contracts = 2,000 GoOs Settlement spread for the consideration of best bid/best ask These are specified on contract level in a separate annex to this contract. Minimum duration of the cumulated valid best 3 Min = 180 sec. bid/best ask during the settlement window Other notes - Settlement Pricing Procedure Page 24

25 4.11 Settlement of financial Futures on Agricultural Products Important aspects Settlement window Dairy Futures Potatoes Minimum number of contracts traded Dairy Futures Potatoes Minimum number of contracts per order Dairy Futures Potatoes Settlement spread for the consideration of best bid/best ask Minimum duration of the cumulated valid best bid/best ask during the settlement window Other notes Specification 08:55 18:00 CET 10:00 16:00 CET 1 contract = 5 metric tons 1 contract = 250 quintals 1 contract = 5 metric tons 1 contract = 250 quintals These are specified on contract level in a separate annex to this contract. 5 min = 300 sec. If there was no trade with the minimum number of contracts and there were no orders which fulfilled the requirements, the theoretical settlement price can established based on data of other price sources or the chief trader procedure. In case a publication of the underlying index took place, this index price will become the settlement price for the respective contract on that day. The final settlement price is defined in the contract specifications. Settlement Pricing Procedure Page 25

26 4.12 Settlement of financial Wood Pellets Futures Important aspects Specification Settlement window - Minimum number of contracts traded - Minimum number of contracts per order - Settlement spread for the consideration of best bid/best ask Minimum duration of the cumulated valid best bid/best ask during the settlement window Other notes - - There is no order book trading in products for Wood Pellets futures, only Trades Registrations. As a result, trades and orders cannot be determined. In this case, prices are established with the help of data of other price sources or the chief trader procedure. The final settlement price is defined in the contract specifications. Settlement Pricing Procedure Page 26