Nodal Exchange Current Month Margining – Revised Approach

Background

All Nodal contracts exhibit greater volatility during the current month by virtue of the available market information, and this current month volatility 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. It was previously proposed that the historical current month series take effect one business day before contracts enter into the current month, and would continue to apply until contract expiry the following month. To avoid a “doubling” effect from the process affecting both the new expiries entering current month status and any expiring positions, current month contracts will now be margined using the “chained” current month price series on the third business day of the current month.

Margin Calls

The proposed changes will be made at the close of business 5 April 2011 and will be reflected in the standard end of day margin calls made on the morning of 6 April 2011.

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

Yours sincerely,

Chris Jones
Executive Director, Head of Risk Management