Collateral Position at xoserve Energy Balancing Credit Committee London, 22 November 2010 Jeroen van den Heuvel
Content Request for change in collateralization with xoserve APX-ENDEX Collateral setup Current collateralization with xoserve Consequences of current setup Proposed solution Historical data analysis Balance Information 2
Dear members of the Energy Balancing Credit Committee, APX ENDEX is operating as the balancing responsible party for the UK Gas market. As the balancing party, APX ENDEX is treated by National Grid and xoserve as a regular member of its transmission system and is therefore required to cover its outstanding position with sufficient collateral. APX ENDEX covers its required collateral by means of cash, but due to the implications on its internal processes, APX ENDEX is hereby proposing an alternative method to cover its required collateral without impairing the credit requirements of xoserve. APX ENDEX operates as an exchange and is therefore not taking an active position in the market. Consequently, the only position it holds at National Grid is effectively an intermediary position held on behalf of its members. Members trading on the APX ENDEX exchange are required to cover their positions through either cash or a letter of credit. APX ENDEX in turn uses the cash collateral placed by its member to cover the collateral required by xoserve. Furthermore, ABN Amro will provide real time account information to xoserve based on MT 940 (or MT 942) statements, where xoserve will at all times be assured that APX ENDEX does indeed hold sufficient collateral to cover its position at xoserve. Currently, ABN AMRO’s credit rating does not meet your minimum eligibility criteria. However, considering the banks overall position and the fact that it is pledging an already fully secured position will hopefully enable this committee to recognize ABN AMRO, for the purpose of this proposal, as a creditworthy counterparty. The remainder of this presentation provides some illustrative background on the proposed pledge solution. We hope this solution satisfies your requirements, and we are looking forward to continue and further develop our current working relationships. This current structure is deemed rather inefficient, since APX ENDEX is not able to automatically upload the member’s cash position into the trading platform as the amount needs to be manually adjusted for the portion being transferred to xoserve. Yours sincerely, In order to prevent these manual workarounds, APX ENDEX is proposing to pledge rather than physically transfer the required collateral. This would effectively grant the same level of security towards xoserve but avoids manual adjustments to the cash accounts held by APX ENDEX in the name of its members. Jeroen van den Heuvel The pledge would be put in place by means of a bilateral contract between APX ENDEX and xoserve where ABN AMRO, our house bank, will confirm in writing that it will honour the pledge agreement at all times. 3 Group Finance Manager APX ENDEX
APX-ENDEX Collateral setup Eurolight trading Platform Position Account Member A Position Account Member B Position Account Member C Position Account Member D Automated bank upload Manual Entry 1: 1 relationship between bank and position accounts ABN Account Member A 4 ABN Account Member B ABN Account Member C Letter of Credit Member D
Current collateralization with XOServe xoserve requires us to deposit cash or a letter of credit with a minimum credit rating Currently, APX-ENDEX settles its collateral requirement in cash Due to the volatile nature of the required collateral, a letter of credit is too static and too expensive. The cash is taken from available member’s collateral deposits and transferred to xoserve This is agreed between APX-ENDEX and its members via the membership rules Members deposit the cash collateral into a mutual “short term” collateral account or an individual long-term collateral account. The cash used to securitize the xoserve position is taken from the “Short term” collateral account. Member’s collateral is used to securitize xoserve exposure. Account balances need to be manually adjusted! 5
Consequences of current setup xoserve Eurolight trading Platform Position Account Member A Position Account Member B Position Account Member C Position Account Member D Cash Transfer Manual Entry Short term collateral pool ABN Account Member A 6 ABN Account Member B Member C Letter of Credit Member D
Proposed solution 1/2 Securitization based on pledge rather than actual cash transfer APX ENDEX pledges the total sum of the available cash collateral to xoserve will receive real time account information (MT 940/942) to ensure proper monitoring of credit status. xoserve will have quicker confirmation on required collateral position as cash transfers take a few business days to process. In the rare event of a shortfall, APX ENDEX will transfer additional cash to cover the shortfall (no change to current procedure). The solution enables APX ENDEX to streamline its processes across all markets For xoserve there are no more cash collateral transactions to be processed. Pledge will be confirmed and honoured by ABN Amro No rule changes for members required 7
Proposed solution 2/2 xoserve Eurolight trading Platform Position Account Member A Position Account Member B Position Account Member D Pledge Automated bank upload Manual Entry 1: 1 relationship between bank and position accounts ABN Account Member A 8 Position Account Member C Member B ABN Account Member C Letter of Credit Member D
Historical data analysis 9
Balance information Monitoring the security position on a daily basis requires up-to-date information on aggregate balances of all pledged accounts. This may be achieved by means exporting the relevant data through SWIFT messaging. This data can be uploaded in xoserve’s electronic banking application in the form of third party accounts. 10 10 xoserve electronic banking application Options: SWIFT MT 940 Aggregate balance pledged accounts Balance Account Member A Balance Account Member B Balance Account Member C End of day statement SWIFT MT 942 Intraday statements; sent out up to 6 times a day SWIFT MT 940/942 Messaging ABN Account Member A Member B Member C
Next Steps Agree on proposed solution Sign pledge agreement Setup MT 940 account balance reporting Refund all outstanding cash collateral from xoserve to APX ENDEX 11
Thank you for your attention 12 Energy Balancing Credit Committee London, 22 November 2010 Jeroen van den Heuvel
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