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Originating department:Risk Management
Company Circular No:LCH.Clearnet Ltd Circular No 2665
 Service Circular No: 007
Date:5 August 2010
To:All LCH.Clearnet Clearing Members

ERCOT current month margining

Contracts within the Electric Reliability Council of Texas (ERCOT) will be available for trading on Nodal Exchange from August 5 2010 starting with the following locations: Houston Zone, North Zone, South Zone and West Zone.  These contracts are offered for both on and off-peak hours, and settle to the Real Time prices posted by ERCOT.  Please refer to the Nodal Exchange/LCH.Clearnet joint press release “Nodal Exchange and LCH.Clearnet Ltd continue expansion with ERCOT contracts”, dated August 5 2010 for more information.

These ERCOT contracts have historically exhibited greater volatility during the current month relative to previous months, and the historical VaR methodology may under-represent this risk. Margin levels therefore may not be sufficient to deal with the volatility jump when trading moves into the current month for these contracts.

Current Solution
To capture such volatility jumps in our margining for the Nodal market, LCH.Clearnet may require an additional margin charge for portfolios with current month ERCOT RT contracts by applying an effective minimum percentage charge against the ERCOT current month gross portfolio value (GPV) on such positions. The percentage charge, which is applicable only on current month positions, is derived by looking at historical moves within the current month for both outrights and spreads in conjunction with LCH.Clearnet margin guidelines with respect to confidence levels and holding periods. With effect from August 5 2010, the proposed percentage charges can be found in the table below. The percentage charges will be converted to $ charges using the latest average EOD prices for both on-peak and off-peak contracts respectively before applying them to the margin calculations. Subtracted from this current month ERCOT margin requirement will be the implied initial margin already held for this portion of the portfolio. Should the implied initial margin be greater than the above ERCOT margin charge, no incremental margin will be called. This incremental requirement will apply to current month ERCOT contracts as of close of business on 5 August 2010.

% charge against GPVOn-peakOff-peak
ERCOT outright contracts20.18%17.37%
ERCOT spread contracts9.36%5.74%

Margin Calls
As the above solution will initially be applied manually, any margin amounts will be called in the morning UK time outside of the 9am PPS call. In determining whether any margin calls are made, LCH.Clearnet will consider, among other things, the absolute level of the potential incremental margin amount as well as any excess cash and/or non-cash collateral held by members. Any incremental margin held for ERCOT current month contracts will be re-evaluated daily. Incremental margin amounts for the current month will first be assessed three business days prior to the start of the month and this process will run through the current month until three business days prior to the end of the month, at which point incremental margin for the ERCOT contracts for the next month will be considered.

For more detailed information on the methodology, please contact commoditiesrisk@lchclearnet.com

William Chin
Tel: +44 (0)207 426 3775