Transcript Document 7350271

NGX Secure Trading & Clearing
An Introduction to Commodities Clearing
Executive Summary
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NGX is an established electronic Natural Gas & Crude Oil
Exchange and Clearinghouse
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Over 200+ contracting parties (members) across North America
Clearing over $8 billion monthly of physical gas, crude and financial power
Delivering over 14 Bcf of physical gas & 400,000 bpd
Capital structure includes full margining, settlement bank credit facility and
emergency fund
Owned by TMX Group Inc., combination of Toronto Stock Exchange and Montreal
Exchange
Clearing bank and regulatory oversight
Zero-default history
NGX’s value proposition is twofold
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For Traders: optimize counterparty access, maintain anonymity
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For Risk Managers: reduce overall risk, maximize capital and operational
efficiency
NGX’s ‘direct’, non-mutualized clearing model is ideally suited
to the trading and clearing of physical energy commodities
Sections
• Overview
• Clearing Structure
• Risk Management
• Contacts
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Introduction to NGX
• Business Concept:
– Provide electronic trading and clearing services to North
American energy market participants
– NGX is a service provider and therefore does not trade or
take positions
• Headquartered in Calgary, Alberta, Canada
• Incorporated in 1993, began trading operations in
Feb 1994
• Ownership History
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Initial Ownership by Westcoast Energy Inc.
Acquired by OM on Jan 1, 2001
Acquired by TSX Group March 1, 2004
Acquired NetThruPut on May 1, 2009
NGX Core Competencies
• Clearinghouse Operations
– Physically and financially settled over 1,400,000 trades
– Zero-default history
• Liquidity Development
– Focus on customers and quality of service
– Commitment to the reduction of trading impediments
• Electronic Trading & Clearing
– Over 15 years of experience developing and operating highreliability, high-performance electronic trading and clearing systems
– Trading now available through the InterContinental Exchange (ICE)
leading-edge trading platform
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NGX Services
• Exchange
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Centralized electronic trading
Standardized contracts
Pipeline balancing instruments
Cleared and bilateral trading
Market advocacy (facilitating transactions)
Market agency (facilitating order entry)
Real-Time Price Index Generation
• Clearing House
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Assured performance
Trade and counterparty netting
Centralized collateral management
Centralized risk management
Operational & Clearing Statistics
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Currently 200+ NGX Contracting Parties
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All “Member” firms eligible to transact through the Exchange and/or clear through the
Clearing House
2008 Gas Trading Statistics:
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Volume = 14.46 Tcf
Transactions = 286,729
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Average Daily Gas Deliveries in Excess of 14.0 Bcf
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Cleared Transactions
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Margin
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Over 200 corporate margin accounts held by NGX
Manage margin accounts in excess of CAD $4.0 Billion in cash and letters of credit
Settlement
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Notional value of transactions consummated through NGX is in excess of CAD $80
Billion annually
Settlement of $US and $CAD cash streams
Monthly settlement values over CAD $2 Billion processed by the clearing house
Sections
• Overview
• Clearing Structure
• Risk Management
• Contacts
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NGX Clearing Operations
Buyer
$
$
CPA
CPA
Commodity
Commodity
Seller
• NGX Intermediation
– NGX acts as buyer to every seller, and seller to every buyer,
for the purpose of facilitating anonymous trading and
clearing
• Private Clearing Operation
– Contracting Parties are not mutually exposed to another
Contracting Party’s default
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How is Counterparty Risk Mitigated?
• Standard Rules
– All Contracting Parties are subject to the same rules and
regulations as set forth in the CPA
– Contracting Parties must meet minimum creditworthiness test and
meet credit requirements on an ongoing basis
• Collateral Provisions
– The requirement for liquid collateral to be placed on deposit with
NGX in advance and in excess of margin requirements provides the
security against default
• Liquidation Rights
– NGX has a number of rights if a Contracting Party default occurs,
including the ability to close-out (or accelerate) all forward positions
for the defaulting party
– Collateral is utilized to cover any liquidated damages
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How is Counterparty Risk Mitigated?
• Backstopping
– Delivery risks are mitigated through the use of backstopping
services provided by various market participants, including storage
facilities, large shippers, and pipeline operators
– Backstopping is typically an arrangement for immediate provision of
supply/market at a pre-determined price (usually based on index)
• Settlement Bank
– The settlement bank daylight and overdraft facilities provide for
clearing operation liquidity during a default situation and assist in
managing timing issues on settlement day
• Guarantee Fund
– NGX provides a USD $100 million trust fund for Contracting Parties
to access in the event of an exchange default
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NGX Clearing Structure
NGX Guarantee Fund
(USD$100MM CIBC Mellon Trust)
NGX Cash Reserves
Deposit
Agreement
Defaulting Party Collateral
(100% Coverage Under NGX Exposure Model)
Deposit
Agreement
Settlement Banking Credit Facility
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Payee
Payer
Commodity
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Commodity
Physical Backstopping
Value Proposition of Clearing
Value of Reduced
Exposure
• Will I get paid?
• Will my gas get
delivered?
Cost of Collateral
• Is the risk reduction
worth the cost?
Risk Mitigation “Trade-Off”
When a Contracting Party introduces risk to the clearing operation
(ex. Receivable exposure or Mark-to-Market losses) they must
provide collateral to support the risk
In return, all Contracting Parties that are exposed to the clearing
operation due to the introduction of risk (ex. Payable positions
and Mark-to-Market gains) are secured against defaults
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Collateral Concentration
OTC Bilateral
Buyer
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A
Seller
$10MM
$10MM
$10MM
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NGX (centralized)
Buyer
Seller
$20MM
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$30MM
$7MM
$3MM
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Access to choose bids/offers from 200+ other market
participants under the same collateral umbrella
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Exchange Netting
Seller
Buyer
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5 Units
10 Units
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NGX (net effect)
Buyer
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5 Units
10 Units
10 Units
Netted 10
Seller
10 Units
5 Units
5 Units
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A
B
C
Sections
• Overview
• Clearing Structure
• Risk Management
• Contacts
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Performance Risks
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Failure to Make/Take Delivery
– NGX is exposed to the price at which an alternative supply/market can be
found
– Risk is managed with backstopping contracts, penalty mechanisms,
collateral requirements and credit policy
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Failure to Pay
– NGX is exposed to receivables risk on settlement dates
– Risk is managed with penalty mechanisms, collateral requirements and
credit policy
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Failure to Provide Collateral
– NGX is exposed to the risk that Contracting Parties will not provide sufficient
collateral to manage their risks
– Risk is managed with liquidation provisions
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Margin Requirements
• Risk Measurement
– Performance risks are quantified through NGX’s margining methodology,
which attempts to estimate probable worst-case portfolio value
• Collateral
– NGX collects collateral from Contracting Parties to secure their portfolios
and protect the clearing operation from defaults
• Margin Triggers
– If margin requirements reach 80% of collateral on deposit, NGX will
request additional collateral
– At 90%, NGX may restrict the Contracting Parties trading capabilities
– At 95%, NGX is entitled to invoke the liquidation procedure
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Risk Measurement
• Accounts Receivable/Payable
– A calculation of the value of Gas/or Crude delivered
– Margin requirement increases if gas/crude is taken prior to
payment, and decreases if gas/crude is delivered prior to payment
• Variation Margin (Mark-to-Market)
– A calculation of the price at which a forward position could be
instantaneously liquidated given current market prices
• Initial Margin
– A calculation of the probability of a movement in market prices
during a two-day holding period
– Initial margin coverage protects against a prolonged liquidation
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Contacts for Further Information
Dan Zastawny – Vice President, Clearing & Compliance
403.974.4335, [email protected]
Matt Frye – Vice President, U.S.
832.978.9835, [email protected]
Janelle Dormaar – Clearing Manager
403.974.1763, [email protected]
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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