Nodal Exchange Current Month Margining   

Background

All Nodal contracts are currently VaR-margined using a 257-day price history. In general, all contracts exhibit greater volatility during the current month by virtue of the available market information, and this is particularly prominent for DA/RT strategies. The historical VaR methodology may therefore under-represent current month risk and margin levels 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 will margin all current month contracts using historical price series consisting of rolling current month prices. These historical current month series will be generated by “chaining” together the current month portions of each Nodal contract by location. The historical current month series will take effect one business day before contracts enter into the current month, and will continue to apply until contract expiry the following month.

Adjustments will likely be made during the short period of contract settlement to avoid a “doubling” effect from the process affecting both the new expiries entering current month status and any expiring positions.

Margin Calls

The proposed changes will be made at the close of business 4 March 2011 and will be reflected in the standard end of day margin calls made on the morning of 7 March 2011.

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

Yours sincerely,

Chris Jones
Executive Director, Head of Risk Management