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Click to edit Master title style NGX Overview July 2010.

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Presentation on theme: "Click to edit Master title style NGX Overview July 2010."— Presentation transcript:

1 Click to edit Master title style NGX Overview July 2010

2 2 Exchange – Products and Operations Capital Structure – Core Security Components Margining and Collateral Policies Risk Management Oversight Agenda

3 3 NGX Summary Own and operate a wholesale energy Exchange and Clearing House Commenced operations in February 1994, headquartered in Calgary, Canada Wholly-owned subsidiary of TMX Group Inc. Product suite includes: –Physical and financial natural gas spot and forward contracts deliverable in Canada and USA –Financial natural gas options for Alberta –Physical crude oil spot and forward contracts deliverable in Canada and USA –Financial power forward contracts for Alberta and Ontario –Ancillary services spot and forward contracts for Alberta (via Watt-ex subsidiary) Utilize the Intercontinental Exchange trading platform, alliance with ICE for Canadian and US gas and power Over 2 million cleared transactions, no NGX defaults through 11 Contracting Party defaults

4 Current Natural Gas Product Locations NGX Products & Services Financial Products NGX INTRA-ALBERTA EMPRESS EMERSON/GREAT LAKES PARKWAY IROQUOIS NIAGARA FALLS CHIPPAWA DAWN ALBERTA POWER SWAPS ATCO N&S STATION #2 TEP MALIN ST. CLAIR ALBERTA SWAPS HUNTINGDON ONTARIO POWER SWAPS HENRY HUB DEMARC NGPL TXOK PANHANDLE EAST NGPL MIDCONTINENT DOMINION SOUTH TCO Physical Products PG&E CITYGATE TGP 500 Transco 65 CG Mainline CG Onshore TGP 800 ANR SE SOCAL CITYGATE NNG VENTURA 5 TETCO STX EP KEYSTONE TETCO ELA EP SAN JUAN TETCO WLA Transco 85 TGT Z1 TGT SL NGPL STX ENBRIDGE CDA CREC MICHCON STANFIELD

5 Current Crude Oil Product Locations NGX CRUDE OIL Physical Crude Delivery Points EDMONTON HARDISTY MILK RIVER KERROBERT CROMER CUSHING MIDLAND ST. JAMES CLOVELLYHOUMA 6

6 6 NGX Exchange Operations Oversee the central rules and regulations of the Exchange, the NGX Contracting Party’s Agreement (“CPA”) Enforcement of rules, such as trade-in-error provisions Calculate and publish price indices for Canadian natural gas and power markets for use in derivatives settlement and market price references between third parties and market participants Calculate and publish over 15,000 contract settlement prices each business day covering over 480 forward curves Develop products and markets, working with Contracting Parties to list new contracts and stimulate liquidity in new markets and product classes

7 Exchange – Products and Operations Capital Structure – Core Security Components Margining and Collateral Policies Risk Management Oversight Agenda 7

8 8 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 a failing Contracting Party’s default Hybrid Model –Operate futures market principles tailored to cash/forward products (futures/forward settlement and margining differences) Central, Standard Agreement –All NGX participants sign a single uniform version of the NGX Contracting Party’s Agreement $ $ or Commodity CPA Buyer Seller $ $ or Commodity CPA

9 9 Key NGX Clearing Statistics 220+ Contracting Parties (“CP’s”), member firms who have executed the standard Contracting Party’s Agreement (“CPA”) Over $6 Billion CAD equivalent in transactions processed monthly Average $1 Billion CAD equivalent in net settlement each month Physically settle over 25 Bcfd of physical natural gas and 4 Million Bbls of crude oil monthly on average Financially settle over 6 Million MWhs monthly on average Peak collateral held of $4.4 Billion CAD equivalent, average over $2.9 Billion in 2010 Processed three CP liquidations in 2008, all resolved with no losses to NGX or any CP’s, eight total defaults in NGX history also resolved with no losses to NGX or any CP’s No liquidations in 2009 or 2010

10 10 Capital Structure Physical Backstopping $ $ or Commodity Payer Payee $ $ or Commodity Settlement Banking Credit Facility Defaulting Party Collateral (100% Coverage Under NGX Exposure Model) NGX Guarantee Fund (USD$100MM CIBC Mellon Trust) Deposit Agreement Deposit Agreement

11 11 Guarantee Fund Structure –Fund is comprised of a TD Bank letter of credit for USD $100MM, LC backed by TMX Group –LC held in trust by CIBC Mellon Trust, who acts as Escrow Agent to carry out default functions under the deposit agreement Access –All CP’s are parties to the Deposit Agreement and are eligible to file claims, NGX cannot submit a claim to draw against the fund –In the event that NGX should default on a CP, that CP may make a claim on the fund –If the claim is uncontested by NGX, the Escrow Agent will pay the CP directly from the fund –If the claim is contested by NGX, the matter is sent to mediation and arbitration, Escrow Agent then directing payment based on the decision –In the event that multiple claims are filed in excess of the value of the fund, trustee will determine payments on pro-rata basis

12 Exchange – Products and Operations Capital Structure – Core Security Components Margining and Collateral Policies Risk Management Oversight 12 Agenda

13 13 Contracting Party Performance Obligations 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, liquidation provisions, and a continuous mark-to-market system Payment –NGX is exposed to receivables risk on settlement dates –Risk is managed with penalty mechanisms, collateral requirements and liquidation provisions Provision of Collateral –NGX is exposed to the risk that CP’s will not provide sufficient collateral to manage their respective risks Solvency –Risk is managed with margin triggers and liquidation provisions –NGX is exposed to the risk that Contracting Parties remain solvent and can perform all the above obligations with interruption

14 14 Margin Desk Operations Margin Triggers –Margin requirement reaches 80% of collateral on deposit a margin call is made with next-business day requirement –Margin requirement reaches 90% of collateral on deposit and ability to enter into new positions or grow existing positions is restricted –Margin requirement reaches 95% of collateral on deposit and all trading is halted and rights to invoke liquidation procedure are activated Liquidation –On default, NGX is entitled to invoke liquidation procedure –Involves offsetting all open positions in the portfolio of the defaulting CP through the “sale” of the portfolio –All liquidated damages are paid from the defaulting CP’s collateral on deposit –CP is terminated following liquidation

15 Components of Margin Accounts Receivable –A calculation of the value of commodity delivered –Margin requirement increases if commodity is taken prior to payment, and decreases if commodity 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 AR + VM + IM = Margin Requirement which must be collateralized 15

16 16 Collateral Management Collateral Policy –CP’s must have sufficient collateral to cover their Margin Requirement, utilizing any combination of the forms of collateral and offsets below –Collateral is held to support the CP’s traded positions and can only be used to remedy a performance failure by the Contracting Party itself Collateral Requirements –Collateral is accepted in the form of cash and irrevocable standby letters of credit from an A or higher rated bank, in both USD and CAD denominations –Letters of Credit are restricted by underwriting bank at the discretion of NGX, based on creditworthiness and payment drawdown history –Collateral is also deemed from accounts payable credits (representing net sales delivered) at certain times and from positive variation margin Warehousing –Cash collateral is held in segregated overnight money market accounts at TD bank, earning interest –Original letters of credit are held by TD for safe keeping –Cash remains an asset of the CP through the Collateral Agreement and associated Undertaking with TD Bank

17 Exchange – Products and Operations Capital Structure – Core Security Components Margining and Collateral Policies Risk Management Oversight 17 Agenda

18 18 Adequacy of Financial Safeguards Margin Back Testing –NGX performs quarterly back-testing of margin rates to determine if the number of actual price movements beyond the margin rate exceeds the expected number of exceptions Margin Stress Testing –NGX performs quarterly stress-testing of margins to ensure that at extreme levels of price stress (up and downward curve fluctuations of 25 to 100 percent) that the financial safeguards in place are adequate to cover any un-margined potential losses Procedures –In the event that a back-testing scenario leads to more exceptions than the model anticipates, margin rates are increased –In the event that a probable stress scenario would cause the emergency fund to be inadequate, NGX must take a course of action including any or all of increasing margins, instituting lower position limits, or increasing the Guarantee Fund

19 19 Insolvency, Netting and Legal Risk Management Eligible Financial Contracts (EFC’s) in Canada –NGX products are “derivatives” within the EFC rules –Have all the “hallmark” features of EFC’s as set out in Blue Range and Androscoggin case law, including acceleration, termination and netting –Results in NGX being able to rely upon its rights under the CPA with respect to collateral, netting and liquidation FDIC Improvement Act of 1991 in the US –As a Derivatives Clearing Organization, NGX is protected in the US by the Federal Depository Insurance Corp. Improvement Act of 1991 –DCO collateral and netting terms and conditions are given priority over insolvency legislation in settling claims

20 Exchange – Products and Operations Capital Structure – Core Security Components Margining and Collateral Policies Risk Management Oversight 20 Agenda

21 21 Oversight Settlement Bank –TD Bank, NGX’s Clearing Bank, maintains day-to-day operational oversight of NGX clearing operations to support credit facility, CAD $300MM daylight, CAD $20MM demand, USD $100MM LC –Clearing Bank controls segregated collateral accounts –Clearing Bank authorizes movement of funds from collateral accounts –Clearing Bank has full access to NGX trade/clearing data and reporting, ensures collateral accounts are sufficient to manage Contracting Party margin requirements –NGX will facilitate 1-on-1 meeting with CP and TD to confirm and corroborate risk management practices undertaken by TD Bank TMX and Financial Audit –NGX is audited through TMX internal audit function, segregated and arms- length from NGX audit –Variation margin and trade payables/receivables on NGX financial statements as audited through regular financial audits, fall under CEO/CFO certification policies

22 22 Oversight - Regulatory Canada –NGX is an Exchange and Clearing Agency as recognized by the Alberta Securities Commission –Subject to core principles of the order, including maintenance of adequate financial resources, rule enforcement, and enforcement of participant eligibility standards –Reporting requirements ranging from immediate notification to quarterly and annual reporting –Regular audits conducted to ensure compliance, including requirement for external risk review every three years United States –NGX is a Derivatives Clearing Organization as recognized by the Commodity Futures Trading Commission –Must follow the reporting requirements, and will be part of CFTC audit program to ensure compliance with application and DCO order requirements

23 23 _____________________ Natural Gas Exchange Inc. Suite 2330, th Avenue SW Calgary, Alberta Canada T2P 3N3 Phone: Fax:


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