Standardization in

1
Standardization in OTC Clearance and
Settlement
Return to Risk Limited website
www.RiskLimited.com
February 25, 2004
Holly Arney Chief Risk Officer Actuarials
Exchange
2
Standardization in Energy Finding Hidden Risk

• Four major areas of current risks
• Industry / Regulatory Risk
• Legal / Contract Risk
• Operational Risk
• Default Risk

3
Regulatory Risk Credit Stress in the Energy
Industry The Problem

• Indictments continue, but appear to be winding
  down
• Continued Stressors in the industry hitting Wall
  Street Targets and Layoffs
• FERC, CFTC, DOE, DOJ and SEC are looking at ways
  to prevent future crises
• Continued unstable regulatory environment
• Reliability Standards and Must Run Standards
• Consumer Protections
• Energy Bill
• Customer Protections

4
Regulatory Risk The Senate Energy Bill

• Ensures reliable and affordable electricity,
  repeals antiquated laws that have cost consumers
  billions of dollars and prohibit onerous federal
  meddling that could cost consumers billions of
  dollars more. It increases penalties for market
  manipulation and enhance (sic) consumer
  protections.
• Title 12, Overview of Senate Energy Bill 2004

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Creating Terra Firma

• Creating reliable wholesale prices for NG and
  Electricity
• Educating the Public Market Supply and Demand
• Ensuring a secure supply of commodities by
  encouraging development

6
Update Clearing

• Clearing Competition still Nascent
• Not Favored by Exchanges / Clearinghouses
• Favored by End-User
• Eurex and new entrants to the market
• Setting Sane Limits
• On the formation of multi-exchange and
  clearinghouse efforts
• Issues
• Size of Market
• Assumption of Obligations in multi-exchange
• What legal recourse is there in a default event?
• Assigning Rights

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Cost Effectiveness Alternatives

• Clearing
• Mutualization
• Least Expensive
• Nascent
• Bilateral Netting (MNA)
• Limited Amounts
• Lack of Standardization
• Little Risk Diversification
• Bilateral Cross-Commodity Netting
• Increased benefit to a degree
• Standardization Issues
• Holding the Risk

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Standardized Clearing

• Rules By-Laws
• Procedures
• Decision Makers
• Recourse (arbitration or other legal redress)
• Margining
• Initial Margin
• Variation / Daily / Pass-through Margin
• Setting Sensible Levels
• Confidence Levels
• Time
• Methodology
• Setting Product Limits Guarantee Fund

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Physical Default Peculiarities

• The philosophy of commodities
• Standard
• Wholesale
• Time Sensitivity
• Transmission Bottlenecks
• Price Transparency Replacement Cost
• 5000 or more
• Standard Market Design the holy grail 2006

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Further Questions holly.arney_at_actuarials.com