Originating department:	Risk Management
Company Circular No:	LCH.Clearnet Ltd Circular No 2649
Service Circular No:	005
Date:	08 July 2010
To:	All LCH.Clearnet Nodal Clearing Members

DA/RT Spread Margining

Background
Both Real Time (RT) and Day-ahead (DA) monthly futures contracts are currently available for trading on Nodal Exchange for the following locations: PJM Western Hub, PJM AEP-Dayton Hub, PJM Northern Illionois Hub and MISO Cinergy Hub.  These contracts are offered for both on and off-peak hours.

While DA/RT spreads trade at fairly constant levels prior to the current month, they exhibit greater volatility during the current month by virtue of available information to differentiate the two legs of the spread.  Historical VaR methodology may under-represent this risk. Margin levels therefore may not be sufficient to deal with the volatility in the current month.

Current Solution
To capture such volatility in our margining for the Nodal market, LCH.Clearnet may require an additional margin charge for portfolios with current month DA/RT spreads by applying an effective minimum $ charge on such spread positions. The $ charge, which is applicable only for the current month, is derived by looking at potential moves on current month historical spreads and applying LCH.Clearnet margin guidelines with respect to confidence levels and holding periods. With effect from 19 July 2010, the proposed charges are $4.30 per MWh and $3.24 per MWh of DA/RT spread for onpeak and offpeak positions respectively. Subtracted from this current month DA/RT 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 DA/RT charge, no incremental margin will be called. This incremental requirement will apply to current month DA/RT spreads as of close of business on 16 July 2010.

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 DA/RT current month spreads 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 DA/RT spreads for the next month will be considered.

For more detailed information on the methodology, please contact [email protected]