NGX Secure Trading

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NGX Secure Trading ClearingAn Introduction to
Commodities Clearing
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Executive Summary

• NGX is an established electronic Natural Gas
  Crude Oil Exchange and Clearinghouse
• 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
• NGXs value proposition is twofold
• For Traders optimize counterparty access,
  maintain anonymity

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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
• Initial Ownership by Westcoast Energy Inc.
• Acquired by OM on Jan 1, 2001
• Acquired by TSX Group March 1, 2004

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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 high-reliability, 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
• 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
• Assured performance

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Operational Clearing Statistics

• Currently 200 NGX Contracting Parties
• All Member firms eligible to transact through
  the Exchange and/or clear through the Clearing
  House
• 2008 Gas Trading Statistics
• Volume 14.46 Tcf
• Transactions 286,729
• Average Daily Gas Deliveries in Excess of 14.0
  Bcf
• Cleared Transactions
• Notional value of transactions consummated
  through NGX is in excess of CAD 80 Billion
  annually
• Margin
• 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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Sections

• Overview
• Clearing Structure
• Risk Management
• Contacts

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NGX Clearing Operations

• 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 Partys 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 (USD100MM CIBC Mellon Trust)
NGX Cash Reserves
Deposit Agreement
Defaulting Party Collateral (100 Coverage Under
NGX Exposure Model)
Deposit Agreement
Settlement Banking Credit Facility
Physical Backstopping
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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
NGX (centralized)
20MM
30MM
7MM
3MM
Access to choose bids/offers from 200 other
market participants under the same collateral
umbrella
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Exchange Netting
NGX (net effect)
10 Units Netted 10 10 Units
10 Units
5 Units
5 Units
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Sections

• Overview
• Clearing Structure
• Risk Management
• Contacts

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Performance Risks

• 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
• Failure to Pay
• NGX is exposed to receivables risk on settlement
  dates
• Risk is managed with penalty mechanisms,
  collateral requirements and credit policy
• 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 NGXs
  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, dan.zastawny_at_ngx.com Mat
t Frye Vice President, U.S. 832.978.9835,
matt.frye_at_ngx.com Janelle Dormaar Clearing
Manager 403.974.1763, janelle.dormaar_at_ngx.com
_____________________ Natural Gas Exchange
Inc. Suite 2330, 140 - 4th Avenue SW Calgary,
Alberta Canada T2P 3N3 Phone [phone] Fax
403.974.1719 www.ngx.com