Explanatory note data publication Front Report

Transcription

1 Explanatory note data publication Front Report At the end of each business day, ICE Endex establishes settlement prices for all the markets it operates. The Front Report as published in the ICE Report Center provides a summary of the contracts frequently used in end user delivery contracts. Thus intending to provide a transparent overview of the more relevant contracts as well as to clarify for which contracts the pricing window methodology was used. The Front Report is available for the following ICE Endex contracts: BPB: Belgian Power Base Load Futures DPA: Dutch Power Peak Load (8-20) Futures DPB: Dutch Power Base Load Futures TFM: TTF Natural Gas Base load Futures For others contracts, the Front Report can be produced on clients demand. The front prices for these markets as published in the report (e.g. for Belgian Power Base Load Futures Month + 3, Quarter + 4 and Calendar + 3) are based on the pricing window or, as the case may be, by the fallback scenario. Settlement prices established by means of the pricing window are prices based on trades and quotes, fulfilling pre-defined prerequisite conditions (as detailed later in this document) from ICE Endex trading platform leading to a higher transparency of the calculation input; while settlement prices established by means of the fallback scenario are prices resulting from a market assessment. In case a price has been established by means of the pricing window, this price is marked with a 1. In case a price has been established by other means than the pricing window following the process described in the ICE Endex Futures Market Rules, this price is marked with a 2. Settlement prices before their publication are displayed on the trading platform as preliminary settlement prices to market parties, and are subject to a 5 minute window for submitting remarks with regards to the preliminary settlement prices Once the 5 minute window is closed the settlement prices will become final and published accordingly. A reasonable professional understanding of the price formation on the wholesale energy markets is required to assess and understand the prices published in this report. Intermediaries should take the professional experience on the wholesale energy market of their customers and/or clients into account when advising on the usage of these prices in commercial contracts or other purposes.

2 The Front Report can be found under the following link: The pricing methodology as applied by ICE Endex is further explained below for information purposes only and on the condition that errors or omissions shall not be made the basis for any claim, demand, or cause of action. The settlement prices are established on the basis of the following steps: 1.Pricing window 2.Fallback 3. Arbitrage Free Methodology 4. Preliminary Publication 5. Publication 1. Pricing window Methodology ICE Endex will try to establish settlement prices based on the order book starting at a pre-defined time (for a period of 15 minutes), the so-called pricing window. Executed trades and/or orders in the trading screen during this pricing window will constitute the basis for the determination of settlement prices. In case prices cannot be established based on the order book activity, a fall back scenario will be in place, the so-called alternative approaches. The alternative approach may take trading activity outside the pricing window or quotes from alternative sources as input. In general, the basic principle of establishing a pricing window means that settlement prices will be determined by a combination of actual trades as well as firm orders on screen during a pre-defined time period, which complies with the conditions as set per individual market. These conditions include the following: start- and end time of the pricing window; minimum traded volume requirements; minimum volume size of orders; maximum settlement spread for combination of best bid-best ask orders; cumulated minimal duration of valid best bid-best ask orders; minimum number of distinctive market parties that support the best order; volume weighting of trades; weighting factor between average trade price and average mid order price.

3 Orders from distinctive market parties are only taken into account if the standard deviation of this order is less than 0.20 of the best bid or best offer respectively. All orders during the pricing window that are within the 0.20 standard deviation from the best order will be used for counting how many distinct market parties are active per individual strip. Input from the pricing window of the respective strip will be deemed as valid only if the required minimum number of distinctive market parties is reached (e.g.: For Dutch Power Base load this parameter is set to a minimum of 4 market parties). Further details on the parameters for the individual markets can be found at Only transactions, bids, and offers in the order book of the ICE Endex Futures Exchange are taken into account for calculating the prices; block trades, EFPs and EFSs reported by means of the Block Trade Facility are disregarded. Trades that have been cancelled during the pricing window will not be included in the calculations either. As part of its responsibilities as the operator of a regulated market, ICE Endex will monitor market developments during the pricing window and will not consider individual prices or orders in case they are not in line with the actual conditions of the market. In case of fast moving market conditions, the applicable maximum settlement spreads will double. Scenarios In theory, 4 different situations could occur during the pricing window. These scenarios are described below and the examples are valid for a settlement pricing session for Dutch Power monthly base load contracts. 1. At least one valid trade occurs and valid cumulative 3 minutes order spreads for settlement are listed on screen: settlement price = weighting factor*average Trade Price 1 + weighting factor*average Mid Order Price 2 1 Average Trade Price = volume weighted average of traded prices 2 Average Mid Order Price = mean value of average Best Bid and Best Ask

4 TIME Best Bid Best Ask Trade ,80 (5 MW) (10 MW) 15:51 15:53 59,80 (5 MW) (10 MW) / 10 MW / 5 MW (5MW) (5 MW) Average Trade Price Average Mid Order Price Settlement Price At least one valid trade but no valid cumulative 3 minutes order spreads on screen: settlement price = Average Trade Price TIME Best Bid Best Ask Trade / 10 MW / 5 MW (2MW) (3 MW) Average Trade Price Average Mid Order Price - Settlement Price No valid trades but valid cumulative 3 minutes order spreads are on screen: settlement price = Average Mid Order Price 3 Minimum volume requirement not met

5 TIME Best Bid Best Ask Trade ,80 (5 MW) (10 MW) 15:51 15: (5 MW) 60,25 (10 MW) (5MW) (5 MW) Average Trade Price - Average Mid Order Price Settlement Price No valid trades and no valid orders on screen: Fall back scenario comes in place to establish settlement prices. TIME Best Bid Best Ask Trade ,80 (5 MW) (10 MW) Average Trade Price - Average Mid Order Price - Settlement Price Fallback 2. Fallback Methodology In the event there are insufficient valid quotes and transactions during the pricingt window Market Supervision will apply an alternative methodology in the following ranking order of preference: (1) Implied Price; If applicable, the implied price of the missing strip will be used as preliminary settlement price. (2) Trading activity during the day; The market activities (quotes, trades and market trend) during the day will be used as input. (3) External sources; The latest market activities (quotes, trade and market trend) as available by external data provider(s) will be used as input. (4) Correlated Market as proxy; The market trend of the market of which price formation in the past has shown to be most heavily correlated market will be used as input. 4 Minimum time requirement not met

6 (5) Price assessment; This is a discretionary assessment combining multiple sources (from market parties, market trend and/or previous settlement) of input. 3. Basics of the arbitrage free methodology Since the settlement prices are primarily used for margin purposes of the clearing house, in some circumstances the settlement prices, as determined by either the pricing window or the fallback scenario, may need to be adjusted in order to be free of arbitrage. These conditions are required by the clearing house in order to have a secure and correct margining process. Contracts with overlapping delivery periods will need to be priced in line. With reference to possible arbitrage opportunities, the following contracts are directly linked to each other: Calendar vs. Quarters; Calendar vs. Months; Season vs. Quarters (in case of Gas futures); Season vs. Months (in case of Gas futures); Quarter vs. Months. ICE Endex will apply an arbitrage free methodology, by means of a weighted average, in which the prices determined by the pricing window will prevail over the prices derived from the fallback scenario. Several cases could be defined: - Case 1: only 1 price is originating from fallback, while all others are originating from the pricing window. In this case, the price from the fallback will be implied price; - Case 2: more than 2 prices are originating from fallback, while the others are originating from the pricing window. In this case, all the prices from the fallback will receive an arbitrage correction; - Case 3: all prices are originating from fallback. In this case, all the prices will have an equal arbitrage correction; - Case 4: all prices are originating from the pricing window. In this case, all prices will have an equal arbitrage correction. To illustrate the effects resulting from the arbitrage free methodology, 4 examples are shown below (excluding the mathematical details)

7 Example 1: Apr, May and Jun are set by the pricing window while Q2 is from fallback. The price for the Q2 contract will be replaced by the implied price: Apr May Jun Q2 Preliminary results 38.01* 35.96* 39.07* - Implied Price Final Results Example 2: Q2 and Apr are set by the pricing window while May and Jun are from fallback. Therefore the May and Jun will be adjusted accordingly: Apr May Jun Q2 Preliminary results 38.01* * Implied Price Final Results Example 3: Apr is set by the pricing window while Q2, May and Jun are from fallback. Therefore the Q2, May and Jun will be adjusted accordingly: Apr May Jun Q2 Preliminary results 38.01* Implied Price Final Results Example 4: Q2, Apr, May and Jun are calculated from fallback (the same applies if all contracts are priced by the pricing window): Apr May Jun Q2 Preliminary results Implied Price Final Results In exceptional circumstances the possibility of overlapping arbitrage opportunities exists. For these specific cases, a priority order has been defined as follows; (1) Months vs. Quarter; (2) Quarters vs. Calendar; (3) Quarters vs. Season.

8 Each round is executed in a consecutive order, for which the outputs of the preceding round are fixed and no longer adjustable by succeeding rounds. The arbitrage free prices will be used as input for the calculation of the full curve, providing settlement prices for all contracts tradable at ICE Endex. 4. Preliminary publication of settlement prices The curve is supplied to the market as preliminary settlement first through the trading platform. As from this moment, the members have a 5-minute window of opportunity to give remarks and comments on the curve to Market supervision Amsterdam. If no comments or remarks are received in this 5 minute window, the curve will be final. If comments were received that were considered valid and Market Supervision has decided to amend the preliminary settlement, the new settlement prices will again be published on the trading platform for another 5 minutes window of opportunity to give remarks. If no comments or remarks are received in this second 5-minute window, the curve will be set on final. If however in this second 5-minute window comments were received that were valid and Market Supervision had to amend the settlement, the new settlement will directly be set on final. To allow for timely processing, comments and remarks on the preliminary settlement prices must be addressed directly to the Market Supervision team in Amsterdam reachable at Publication of settlement prices After ICE Endex has established a settlement price for all contracts (in strips of months), the settlement prices are automatically published in the Front Report at the ICE Report Center, A reasonable professional understanding of the price formation on the wholesale energy markets is required to assess and understand the prices published in this report. Intermediaries should take the professional experience on the wholesale energy market of their customers and/or clients into account when advising on the usage of these prices in commercial contracts or other purposes.