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NGX Secure Trading & Clearing An Introduction to Commodities Clearing.

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Presentation on theme: "NGX Secure Trading & Clearing An Introduction to Commodities Clearing."— Presentation transcript:

1 NGX Secure Trading & Clearing An Introduction to Commodities Clearing

2 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 NGX’s value proposition is twofold –For Traders: optimize counterparty access, maintain anonymity –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 2

3 Sections Overview Clearing Structure Risk Management Contacts 3

4 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 –Acquired NetThruPut on May 1, 2009 4

5 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 5

6 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 – Trade and counterparty netting – Centralized collateral management – Centralized risk management 6

7 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 –Settlement of $US and $CAD cash streams –Monthly settlement values over CAD $2 Billion processed by the clearing house 7

8 Sections Overview Clearing Structure Risk Management Contacts 8

9 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 Party’s default $ Commodity CPA $ Commodity CPA Buyer Seller 9

10 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 10

11 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 11

12 NGX Clearing Structure Physical Backstopping Settlement Banking Credit Facility Defaulting Party Collateral (100% Coverage Under NGX Exposure Model) NGX Cash Reserves NGX Guarantee Fund (USD$100MM CIBC Mellon Trust) Deposit Agreement $ Commodity $ Payer Payee Deposit Agreement 12

13 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 13

14 Collateral Concentration NGX (centralized) $3MM $20MM $30MM $7MM OTC Bilateral $10MM A A A B C D B C D A Buyer Seller Buyer Seller Access to choose bids/offers from 200+ other market participants under the same collateral umbrella 14

15 Exchange Netting 5 Units 10 Units A A D B C A NGX (net effect) 5 Units 10 Units Netted 10 10 Units 10 Units 5 Units A B C AD Buyer Seller Buyer Seller 15

16 Sections Overview Clearing Structure Risk Management Contacts 16

17 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 17

18 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 18

19 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 19

20 Contacts for Further Information Dan Zastawny – Vice President, Clearing & Compliance 403.974.4335, Matt Frye – Vice President, U.S. 832.978.9835, Janelle Dormaar – Clearing Manager 403.974.1763, _____________________ Natural Gas Exchange Inc. Suite 2330, 140 - 4th Avenue SW Calgary, Alberta Canada T2P 3N3 Phone:403.974.1700 Fax:403.974.1719

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