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Energy Market Development
Risk Management Training for
BOTAS
Ankara, 25-27 September 2019
Workshop leader: Jan Haizmann
AcademiaStudies & Gratuation Universität Freiburg (Germany)
1st State Exam in Law (1990)
In Munich 2nd State Exam in Law (Ass.iur 1994),
Post-Grad: Brussels University (Dr. iur. - 1998) und London University (LL.M.
1991)
Admission to The German Bar, OLG München 1994Career
1994-1999 Associate Lawyer Graf von Westphalen, Freiburg & Brussels Office
1999-2001 Director Regulatory Affairs, ENRON, London and Frankfurt
2001-2002 Senior Legal Counsel, TXU Energy Trading SA, Geneva
2003-2005 Front Desk Gas, Glencore Energy, London
Since 2006 Chairman EFET Legal Committee, Director EFET Brussels Office
Board Member EFET, Amsterdam,
Member of the EEX Exchange Council, Leipzig
Founder and Managing Director of CORREGGIO CONSULTING, Brussels - successful boutique
advisory firmwww.correggio-consulting.eu- Multiple advice in arbitration proceeding context
- building own practice as independent international expert for energy trading
- planned co-operation with network of lawyers and industry expertsin partnership with European Energy Lawyers Association: www.eela.eu
Introductio
n
225-27 September 2019 BOTAS Workshop, Ankara
Agenda - Day 1
• DAY ONE - Legal Basis Risk/ Contractual Training
– Introduction into traded gas market and market risks
– Contractual training
– What needs to be in a trading contract?
– What is the advantage of standardization (Back-to-Back
risk)
– EFET Trading Gas Agreement in detail
– Questions and Answers
– Test on Contractual Issues
325-27 September 2019 BOTAS Workshop, Ankara
Agenda - Day 2
• DAY TWO (Morning Session)
• Introduction to risk policies for political risks
– KYC principles
– ways to manage trade restrictions such as sanctions
• trade sanctions on Russia and Iran
• DAY TWO (Afternoon Session)
• Regulatory risk
– introduction into compliance system
– REMIT reporting obligations as envisaged by the EU
425-27 September 2019 BOTAS Workshop, Ankara
Agenda - Day 3
• Market Risk Management, Credit Risk Management, Operational
Risks
– Market risk management & ways to mitigate currency risks
– Credit risk management through credit arrangements
• ways to mitigate insolvency risk
• collateralization of trading (what type of collateral)
• functionality of letters of credit
• functionality of parental guarantees
• functionality of a credit department and credit setting with
counterparties
• clearing
– Operational Risks
• Force Majeure scenarios
• non-delivery due to grid failures
– Questions and Answers 525-27 September 2019 BOTAS Workshop, Ankara
Correggio ConsultingBoutique consulting company set up in 2006 by Jan Haizmann
after 15 years of legal and commercial practice
625-27 September 2019 BOTAS Workshop, Ankara
Day Three
Market risk management
Credit risk management
Operational risks
725-27 September 2019 BOTAS Workshop, Ankara
Risk Management in the Energy Trading Business
• Overview, rules and mandates in commodity trading
• Open positions: standard products
• Market risk and limit setting
• Credit risk and credit risk limit setting
825-27 September 2019 BOTAS Workshop, Ankara
Risk Management aims at the protection of financial strength & transparency of risk
- to take well assessed risk in a defined range, an energy trading company needs to carry out:
• Identification
• Analysis
• Quantification
• Monitoring
• Management and control of risk
�Risk Management is a verifiable contribution to a sustainable
economic development of the company!
Risk Management: Definition
925-27 September 2019 BOTAS Workshop, Ankara
Definition of Risk Appetite
Risk Capacity
Maximum risk that can be taken without breaching
financial covenants• Protecting capital required to achieve business plans or maintaining
leverage ratios
• Maintaining adequate funding liquidity to meet known and unknown cash
requirements
• Promoting stable and sufficient earnings to meet return objectives
Risk Appetite
Maximum risk required to meet business objectives
• Setting adequate buffers that ensure risk capacity is not breached under
stress (e.g. 1 in 20 years), define business potential per company
• Set limits from top of the house down to traders
Risk Taken
Current and potential risk level• Monitor current risk level and leading indicators of changes in risk
Risk Appetite
Risk
Take
n
Risk Capacity
1025-27 September 2019 BOTAS Workshop, Ankara
Business Concept
Market RiskRisk the company is willing to take by holding open
positions• Producers / suppliers can take market risk or stay unhedged
• Dynamic hedging can increase notional amount of hedging activity
• Traders take market risk as part of business activity
Credit RiskRisk the company is willing to take regarding OTC
transactions• Hedging OTC incorporates credit risk
• OTC cleared trades can avoid credit risk but create liquidity risk
Liquidity RiskRisk the company is willing to take in the clearing /
margining area• Hedging on exchanges incorporates liquidity risk because of the
margining regime (variation margins and initial margins)
• Liquidity management is crucial
Market
Risk
Credit
Risk
Liquidity
Risk
Hedging
Futures
Hedging
Forwards
Margining
Operational
RiskAlways present
OTC
clearing
1125-27 September 2019 BOTAS Workshop, Ankara
Definition & supervision of the risk management framework
• Definition of the risk strategy and the risk tolerance level
• Co-ordination of activities by the Risk Management-Committee
• Definition of risk reporting necessities on holding/parent level
• Approval of mandates, orders and company limits
• Approval of new product groups
“Rulebook Commodities”
Risk Management Process
Risk Management Process
1225-27 September 2019 BOTAS Workshop, Ankara
Calculation of exposures and supervision of limits (trading
level)
• Risk analysis and definition of detailed limit systems
• Forward curve generation
• Quantification of risk out of trading and wholesale activities
• Mark-to-market, profit & loss, credit exposure, VaR calculations and
related reporting
• Supervision of limits and coverage of economic capital employed
• Development and certification of models and methods for quantification
Trading Risk Management Process
Trading Risk Management
Process1325-27 September 2019 BOTAS Workshop, Ankara
Contains risk management principles and objectives for commodity trading and regulates / defines also:
• transaction principles,
• the orders to the companies as well as the full mandates,
• assignment of tasks and responsibilities,
• approved markets,
• the market and product approval process,
• limits (limits) and the procedure to be applied in case of limit violations,
• the basic risk measuring ratios,
• the framework for risk reporting.
Credit Rule Book
1425-27 September 2019 BOTAS Workshop, Ankara
Open Positions
in Standard
Products
1525-27 September 2019 BOTAS Workshop, Ankara
25MW 31,5€/MWhSell
Flat Position
Forward: contract traded OTC and physically delivered
Future: contract traded on an exchange and financially settled
Buy 25MW 31,2€/MWh
Forward
Forward
• Physically flat position and
• Financially flat position
• We are flat and fully covered (hedged)
• We have locked in P&L of 0,3€/MWh
German Gas Baseload Cal
2018
1625-27 September 2019 BOTAS Workshop, Ankara
Sell
Open Position
German Gas Baseload Cal 2018
Buy 25MW 31,1€/MWh
Forward
Future
• Physically open position and
• Financially flat position
• We are flat and fully covered (hedged) if a liquid spot market exists
where gas is available
• Risk of loss money if we cannot buy without basis risk in the spot
market
Forward: A contract traded OTC and physically delivered
Future: A contract traded on an exchange and financially settled
25MW 31,5€/MWh
1725-27 September 2019 BOTAS Workshop, Ankara
Sell
Open Position
German Gas Baseload Cal 2018
Forward: A contract traded OTC and physically
delivered
Buy 25 MW EPEX Spot Index
Forward
Forward
• Physically flat position and
• Financially open position
• We have a market risk position (delta position)
• We loose money if prices increase
25MW 31,5€/MWh
1825-27 September 2019 BOTAS Workshop, Ankara
Open Position
Sell
German Gas Baseload Cal 2018
Buy 0 MW
• Physically open position and
• Financially open position
• We are short and fully uncovered (no hedge)
• We loose money if prices increase
Forward: A contract traded OTC and physically delivered
Forward25MW 31,5€/MWh
1925-27 September 2019 BOTAS Workshop, Ankara
Probability
You cannot make money with hedging but you can fix
status quo
Hedging
Hedging leads to
• The P&L distribution gets slimmer
• The downside moves up
• Upside potential is reduced
P&L
2025-27 September 2019 BOTAS Workshop, Ankara
Open Position
Open position also exist in FX if
• We buy in USD and sell in EUR (e.g. LNG)
• We buy in EUR and sell in USD
Open position also exist in interest rates if
• Buy short term and sell long term storable commodities
• Investments in assets in general
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Market Risk and
Market Risk Limit Setting
2225-27 September 2019 BOTAS Workshop, Ankara
Risk Categories
Market Risk (CRR applies – regulatory capital)
• Risk resulting from changes in market parameters which
affects all
open positions at asset-, trading and wholesale transactions
• Drivers: market prices, volatilities, exchange rates, spreads, interest rates, correlations
Managing Market Risk• Definition and monitoring of Stop Loss Limits
• Definition and monitoring of Volumetric Limits
• Definition and monitoring of Value-at-Risk (VaR) Limits
• Definition and monitoring of Stress Limits
2325-27 September 2019 BOTAS Workshop, Ankara
Market Risk Measuring and
Limits
Time
P&L
Toda
y
Forward Looking LimitsBackward Looking Limits
Control action possible
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Backward-Looking Limits
• Stop-Loss Limit
• Limits the YtD Total P&L (actual
value of the portfolio)
• Draw-Down Limit
• Limits the YtD Total P&L relative to
the maximum YtD Total P&L
Backward-Looking is a limit type which limit the business on the basis of
the YtD Total P&L. This YtD Total P&L contains the valuation of open
position as a component called unrealised P&L
The maximum loss can go over this value during closing of the positions
2525-27 September 2019 BOTAS Workshop, Ankara
Market Risk Measuring and
LimitsBackward Looking Measures / Limits
• Profit and Loss (P&L)
• Based on a review of the deviation of the contract valuations
• Starting with the current calendar year of all contracts
• Discounted P&L consists of a realized and an unrealized component
• Stop-Loss Limit
• Total amount to limit accumulated annual losses that may have arisen to date (based on
total P&L values)
• If exceeded, all positions covered by the mandate must be closed
• Maximum Loss = Stop-Loss Limit + VaR
• Draw-Down Limit• To protect cumulative annual profits that have already been gained (based on the YTD total
P&L values) .
• If exceeded, all positions covered by the mandate must be closed
• Maximum Loss = Draw-Down Limit + VaR
2625-27 September 2019 BOTAS Workshop, Ankara
Forward-Looking
Limits
How to set forward looking limits?
• Forward-Looking-Limits limit fluctuations of the P&L in the near future.
• The target is to limit open positions.
• Typical Values are between 1
and
1
10 100of the Stop-Loss Limits.
• This should make sure we have enough time to react.
2725-27 September 2019 BOTAS Workshop, Ankara
Risk Measuring and
LimitsForward Looking Measures / Limits
Open positions
• Financially and / or physically open positions
• Net open positions are influenced by fluctuation of the market prices
• Movement of the P&L in a portfolio can be roughly estimated as the amount of
move of the market prices times the net open position (spread positions not
covered!)
• Monthly limits are set for every delivery point per product (cover spread
positions)
Value at Risk• Calculation of the largest possible loss (measured in monetary units), which the
open positions in an unfavourable development of the market can exceed with a
specific probability within a defined holding period
• Limits a possible negative P&L movement / P&L development
• If exceeded, positions covered by the Full Mandate must be reduced immediately
2825-27 September 2019 BOTAS Workshop, Ankara
Lunch Break
2925-27 September 2019 BOTAS Workshop, Ankara
OTC
Credit Risk Limit Setting
3025-27 September 2019 BOTAS Workshop, Ankara
Risk Categories
Credit Risk
• Risk resulting from business partners' non-compliance with contractual obligations (e.g. not able or not willing to pay, insolvency, non-performance)
• Drivers: credit worthiness of business partners, delivery period, MtM ofthe deal and contractual terms like payment conditions, terminationclause, netting clauses (payment, close-out)
• Managing Credit Risk
• Scoring of Counterparts
• Definition and supervision of limits per Counterpart
• Counterpart and exposure monitoring
• Management of collaterals
3125-27 September 2019 BOTAS Workshop, Ankara
Scoring
Agreements
Collateral
Credit Pricing
Respond
Exposures
Payments
Ratings Share
price Bonds
CDS
Key Performance
Indicators
Reduce Exposure
Terminate contract
Stop deliveries
Use Collateral
Prevent
Basic Principle:„No Counterpart
without Limit“
Detect
Short term
MonitoringNear Time
Reporting
Components Credit Risk Management
3225-27 September 2019 BOTAS Workshop, Ankara
Definitions within Credit Risk
EXPOSURE
monetary value (under
consideration)
RISK
exposure * probability
(of default)
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The actual credit exposure is the total of:
• Deliveries already made but not yet invoiced (including those during contract cancellation)+
• Deliveries already invoiced but not yet paid
+
• Positive MtM of future deliveries
Netting of all those components in case of a default (close-out
netting) reduces exposures significantly.
3425-27 September 2019 BOTAS Workshop, Ankara
Credit Risk Tools
• EFET Manual on Credit Risk is useful tool for
credit management (www.efet.org)
• Collateral: Cash
• Collateral: Bank LoC
A guarantee from a financial institution covering the
liabilities of a debtor in case of default.
• Collateral Parental Guarantee
3525-27 September 2019 BOTAS Workshop, Ankara
Starting Point : Structured Portfolio
Optimisation of a Flex Gas Supply Agreement
3625-27 September 2019 BOTAS Workshop, Ankara
Credit Exposures
Time
Credit Limit
Dec Jan Feb
Future Settlement Exposure
Future Exposure
Settlement period Settlement period
Future Performance Exposure
Stop selling products
with delivery in January!!
3725-27 September 2019 BOTAS Workshop, Ankara
Integrated Perspective to Risk
Management
Market price risk arises from significant
asset / contract positions
Credit Risk results from counterparts not
honouring market price risk hedges and
increases if these same hedges move in-
the-money. Hence, we get market risk back
Market Price
Risk
…to actively balance Market, Margin and Credit risks
Margin Risk results from hedging on
exchanges, bi-lateral and OTC
margining, Market price movements
require cash collateral to be posted
Default Risk
(Credit Risk)
Margin Risk
(Cash flow Risk)
Regulatory
& Operational
Risk
3825-27 September 2019 BOTAS Workshop, Ankara
Hedging reduces market price risk and
increases cash flow certainty into the
future, thus supporting investments
1
1Market Price
Risk
Integrated Perspective to Risk
Management
Credit Risk is lower than market price
risk because the credit risk is diversified
across many counterparts and the
probability that all counterparts fail at the
same time is low
Counterparty credit limits cap excessive
exposure. Sometimes this requires
additional business to be done via
clearing i.e. converting credit to margin
risk
Default Risk
(Credit Risk)
Margin Risk
(Cash flow Risk)
2
2
3925-27 September 2019 BOTAS Workshop, Ankara
Counterparty Credit Limits
Credit risk is preferable to market price
risk & margin risk because:Market
Price
Risk
Counterparty Credit limits are an important control process within the
integrated
risk framework…
• Exposure from one market can be diversified
across 10-20 counterparts
• Does not consume large and volatile quantities
of cash needed for investment
• Exposure can be simply limited & netted by
counterparty (depending on jurisdiction)
• Other tools can be used to reduce risks should
market conditions change (Margining,
triangulation and or credit default
hedging/insurance)
Counterparty Credit Exposure Limits
are:• Set based on the financial strength of a
firm, its sector and location
• Regularly reviewed
Default Risk
(Credit
Risk)
Margin Risk
(Cash flow
Risk)
Regulatory
&
Operational
Risk
4025-27 September 2019 BOTAS Workshop, Ankara
The Role of Margining
Market Price
Risk
Margining plays an important role in our risk management but it does have limitations…
Margining bi-laterally, OTC or via an exchange,
can be a helpful risk management tool.
It does, however, have some limitations:
• Requires significant cash facilities to
deal with large and volatile cash calls
• Can lead to a reduction in cash
availability for investment activities
• Can lead to additional borrowing costs
(rating agency assessments)
• Operationally more complex therefore
increased operational risk
• There are limitations on the products
that can be traded
• Still requires some credit risk to be taken
with Banks (clearing), Banks (cash
facilities) and the clearing houses or
counterpart
Default Risk
(Credit Risk)
Margin Risk
(Cash flow Risk)
Regulatory
& Operational
Risk
4125-27 September 2019 BOTAS Workshop, Ankara
The impact of clearing
• They are usually structurally long or short, thus
resulting in limited netting opportunities and
therefore market movements require significant
cash collateral to be posted
• Utilities require cash for investments, most of
their assets are not fungible
Market Price
Risk
Clearing requires a ready supply of cash…
This raises 2 issues for energy companies:
Options for energy companies are:
• Don’t hedge or hedge significantly less, tolerate
market risk, volatile earnings and reduced
investments
• Use margining and secure cash facilities against
existing asset base from Banks, links utilities into
systemic bank failure
• Margin and reduce investments to provide additional
free cash flow € Who makes investment in energy
assets?
Default Risk
(Credit Risk)
Margin Risk
(Cash flow Risk)
Regulatory
& Operational
Risk
4225-27 September 2019 BOTAS Workshop, Ankara
Legal Set-up Cleared Trading
An Overview
> Clearinghouse (“CH”)/Central Counterparty (“CCP”): Bilateral trading relationships with
multiple Clearing Members (“CM”)
> CM: Bilateral trading relationships with CH/CCP and multiple Non- Clearing Member
(“NCM”)
> NCM: Multiple transactions within a bilateral trading relationship with a CM
CM2
NCM/CP1
NCM/CP2
NCM/CP3
CH/CCP CMT Trader/NCM
CM1
CM3
I. Clearing Rules
III. NCM Agreements
II. Clearing Agreement
4325-27 September 2019 BOTAS Workshop, Ankara
– Variation Margin
– Default of CM
– Close-out
– Transfer of Position
and Collateral
Legal Set-up Cleared Trading
I. Clearing Rules
>Clearinghouse (“CH”): Bilateral trading relationships with multiple Clearing
Members (“CM”)
>Clearing Rules:
– How transactions are entered into
– Initial Margin
CM2 CH/CCP CMT
CM1
CM3
4425-27 September 2019 BOTAS Workshop, Ankara
Legal Set-up Cleared Trading
I. Clearing Rules
>Risk Mitigators for CH
–Regulated CM: Most Clearing Rules require that CM must be
financial institutions or hold similar sort of financial licenses
–Initial Margin: Is collateral in form of cash or predefined securities to cover “Close-out Risk” of the CH and are to be posted for the benefit of the CH only and calculated on historic worst case scenarios in market movements
• Close-out Risk is the risk of non-favourable movements in market price
between early termination of entire portfolio of transactions and
replacement of portfolio
–Liability Funds: CMs pay, proportional to their trading volumes, funds into a
segregated liability fund
–Close-out / Transfer of position to new CM
4525-27 September 2019 BOTAS Workshop, Ankara
– Default of NCM
– Close-out
Legal Set-up Cleared Trading
II. Clearing Agreement
>CM/NCM: Multiple transactions within a bilateral trading relationship
>Risk Mitigators: Clearing Agreement (Terms & Conditions of CM; partly
bespoke)
– How transactions are entered into (possibly via Give-up Agreement)
– Transaction “back-to-back” with transaction CM/CH
– Settlement (Variation Margin (“VM”))
– Collateral (Initial Margin (“IM”))
CH CM NCM
4625-27 September 2019 BOTAS Workshop, Ankara
• Clearing
• Collateralisation of transactions against default risks (i.e. theadjustment and administration of positions, calculation ofvariation margin (daily mark to market) and calculation andlevy of margins
• Settlement
• physical and financial fulfillment of transactions
• For the physical settlement ECC is via its affiliated companyECC Luxembourg contractually linked with the majorEuropean Transmission System Operators for power andnatural gas and is also linked to the national register forCarbon Certificates and performs deliveries of EUA andCER 4
7
Definitions: example of ECC
4725-27 September 2019 BOTAS Workshop, Ankara
• Clearing Member (CM) – Takes the (financial) risk of his Non-
Clearing Members, can be also a Trading Participant ( 2.1 Clearing
Conditions).
• Non-Clearing Member (NCM) – Trading Participants that are not
Clearing-Members need a Clearing Member to be admitted to
exchange trading and clearing ( 2.2 Clearing Conditions ).• Trading
Participant
– can be either Clearing
Members or Non-Clearing Members, an acceptance process for each product/proof of
delivery capability required ( 2.3 Clearing Conditions ).
• ECC Lux – 100% affiliated company of ECC AG, operates as a
warehouse for ECC AG and undertakes physical delivery/nominations
Definitions and Roles of the ECC
Participants
4825-27 September 2019 BOTAS Workshop, Ankara
Central Counterparty
Clearing Member
(CM)
Clearing Member
(CM)
CM-Agreement ECC-CM
NCM-Agreement
CM-NCM-ECC
NCM-Agreement
CM-NCM-ECC
BörsenExchanges
Clearing Services Agreement
Fundamental Basis for Taking
Part at ECC Clearing
4925-27 September 2019 BOTAS Workshop, Ankara
• Spot contracts are concluded between ECC and the Buyer/ Seller, 3.4.3 Clearing Conditions
• Derivative contracts are concluded between ECC and the Clearing Member and simultaneously
between the Clearing Member and the Trading Participant 3.4.2 Clearing Conditions.
• Financial fulfilment (payments and margin requirement) goes via the Clearing Member. All payments
are settled between ECC and its Clearing Members on TARGET days through central bank system .
• Physical fulfilment is performed by ECC Lux towards Buyer and Seller, ECC remains to be in the
contractual chain 3.4.4 Clearing Conditions
Contractual Relationships Contracts
Buyer SellerClearing
member
Clearing
Member
Transmission System
Operator /
Certificate Register
(Derivative)
PaymentsPayments
Deliveries Deliveries
EEX Power
Derivatives GmbH
European Commodity
Clearing Luxembourg S.à.r.l.
Central Bank System
(Spot)(Spot)
(Derivative)
5025-27 September 2019 BOTAS Workshop, Ankara
• ECC AG takes the counterparty risk of all transactions.
• In order to ensure fulfilment of all transactions in case of an insolvency or any case of non-performance ECC demands collaterals, so-called margins.
• The calculation is based on international approved methods.
• ECC accepts approved securities or cash as collateral.
• NCM is obliged to provide margins no less than ECC requests from CM according to the calculation method of ECC.
Margin Calculation - Risk Pyramid
ECC
Margin
Trading Participant
Margin
Clearing
Member
Clearing Fund
Trading
Participant
Clearing
Member
5125-27 September 2019 BOTAS Workshop, Ankara
Coffee Break
5225-27 September 2019 BOTAS Workshop, Ankara
Agenda Day 3
– Operational Risks
• Force Majeure scenarios
• non-delivery due to grid failures
– Questions and Answers
5325-27 September 2019 BOTAS Workshop, Ankara
Operational Risk Management (ORM)
Operational Risk is of loss resulting from inadequate or failed
processes, people and systems or from external events.
ORM is defined as a continuous cyclic process which includes risk
assessment, risk decision making, and implementation of risk controls,
which results in acceptance, mitigation, or avoidance of operational
risk.
5425-27 September 2019 BOTAS Workshop, Ankara
Operational Risk: Energy Market Processes
Source: CEER 2014
Sett
lem
ent
/ D
eliv
ery
Mar
ket
Spot / Futures / Derivatives Gas / PowerOrder Mgmt Execution
M-Control M-Surveill
Exchange
Execution on Marketplace
Clearing House
Payment Delivery / Netting
CCP
Clearing Bank
TSO
SCADA
Commercial / Physical Dispatching
Pipeline Satus Own Storage
Balancing Service
Provider
Trader / Shipper
3rd Party Storage
Other TSODSO
Spot / Futures / Derivatives Gas / Power
Financial & Physical Settlement
Trading Risk
Planning Back-Office
Execution Back-Office
Broker
Primary /Secondary Capacity Mgmt.
Platform
Confirmation Matching
Collateral Managemen
t
Regulatory Reporting
Buy / Sell commodity
Buy PrimaryBuy / Sell Second Capacity
OTCClearing Request
Trade Data
Clear.Report
SellPrimary
Capacity AllocationUpdate
Bal.Offer
Bal. CfT
Bal. Req.
Bal. Contr.
Bal.Settl
OTC Execution
Margin Call
Margin Call
ClearingReport
Nomi-nation
Nomi-nation
ClearingReport
Buy / Sell commodity
Physical Settlement Financial Settlement TradingBalancingStandardized Market Comm. Interface
5525-27 September 2019 BOTAS Workshop, Ankara
Operational Risk Management
• Lack of general process maturity in commodity trading
• Exponential ratio between the value of an operation and
the potential damage or loss
• Given the increasing liquidity in some markets, volumes
are rising year after year
• Most processes are highly time critical
Why do you need it?
5625-27 September 2019 BOTAS Workshop, Ankara
Implement: Operational Risk
Management
• Documentation & Formalisation: Processes (STeP),
Procedures, Working Instructions, Manuals,…
• Regular risk assessments, audits and mitigation plans
• Adequate organisation (function and processes)
• Tools
5725-27 September 2019 BOTAS Workshop, Ankara
Standard Gas Trading Processes,
automatic data communication
• Communication relationships:
– Traders – Gas Trading Platform: Trading interface, trade data exchange
– Traders – Capacity Trading Platform: Bidding, base data exchange
– Traders – Traders: OTC trades, OTC secondary capacity trades
– Traders – Gas TSO: nomination
– Traders – Regulators: EMIR / REMIT reporting
– Gas Trading Platform – CCP: Settlement
– CCP – Trader: Clearing reports, margin calls
– TSO – BSP: Requesting balancing services
• Not covered:
– TSO-DSO related processes
– Storage / LNG specific processes
5825-27 September 2019 BOTAS Workshop, Ankara
Standardisation of Back-Office
Functionalities
• Cross-functional teams and workgroups with clear and shared
objectives
• Industry alignment and adoption on standardisation of existing
processes, even longer for new processes (except for regulatory or
legal deadlines)
• Actively managing the standardised processes is required (never
ending task)
• Cost-sharing implementation and service vehicle for EFET
standardised processes
• Turkish traders should seek to use standard European standard
processes -> deviation constitutes risk factor
5925-27 September 2019 BOTAS Workshop, Ankara
Operational Risk: Example Deal Flow I
1) Feeding Contractual Terms into Energy Trading System
(ETS)CREDIT: entering and
approving credit terms
TREASURY: entering
and approving any
security related issues
BACK OFFICE: entering
any operational details
(e.g. address details, bank
account, codes for
scheduling etc.)
LEGAL: entering and
approving any other
relevant legal terms (e.g.
insolvency terms,
jurisdiction etc.)
MARGINING: entering
and approving terms of
CSA if margining applies
LEGAL: final approval of terms entered into trading system;
entering of NETTING OPINION to allow for net exposure calculation of
system
CREDIT: linking of approved trading limits in ETS:
Trading limits for the relevant CP
to be entered into ETS
Linking limits of each CP to:
Limits for applicable
markets and products
Limits of relevant portfolio
Limits of individual traders
CP active in ETS for Trading – day to day deal flow and continuous monitoring starts
6025-27 September 2019 BOTAS Workshop, Ankara
2) Day to Day Deal Flow
FRONT OFFICE:
Trade with CP takes place:
Quantitative
Analysts:
Modeling of
trades to
determine impact
on limits and
portfolio
exposure
Providing terms of trade in
writing to Back Office (term
sheet/email)
Booking of trades in ETS
BACK OFFICE:
Control if bookings and written
terms of trades match
If booking
results in
hitting of
trading
limits
Clarification
with Front
Office and
adjustment of
booking or
term sheet
• Issuance of Confirmations
Entering other operational
information in relevant
systems for Back Office
Ops (e.g. scheduling,
payment time frames)
Final flow of
trade into ETS
as exposure
value
Systematic
inclusion into daily
trade reporting,
and CP & portfolio
exposure reporting
system
Limit and risk
control through risk
management and
other controlling
bodies
Consultation with
Legal if
confirmations
require unusual or
unknown terms
+ -
Operational Risk: Example Deal Flow
II
6125-27 September 2019 BOTAS Workshop, Ankara
3) Ongoing Monitoring and Risk Control
Risk Control Credit Risk Management
(CRM)
Legal Risk Monitoring Operational Risk
Monitoring
• daily control of trade
portfolio (produced by ETS
at the end of the trading
day)
• Control that transferred
collateral (if CSA) meets
own calculation and ETS
terms
• control of market prices,
volatility and liquidity and
impact on trading limits
(potentially adjust ETS)
• control if modeling reflects
market reality
• Approval of potential excess
of limits in coordination with
risk management
• General credit risk
assessment of CP (yearly
after issuance of new financial
report, and, depending on
credit standing, half yearly)
• Specific assessment for
specific transactions if
required, to allow for higher
trading limits (value, volume,
tenor)
• Monitoring of expiry of
security provided by the
counterparty
• Monitoring of potential
payment or delivery defaults
and other credit defaults
• Adjustments of
documentation if changes
in legal form of CP
• Amendments to
agreement if credit terms
or other legal terms of
documentation
(Master/Confirmation)
need to be changed or
drafted specifically
Follow “documentation flow”
• Review of new security
documents provided by
CP
• Termination of
agreements if required
• Updating CP address
and billing details in
ETS
• Securing proper
application of own
payment streams and
physical
delivery/acceptance
systems (scheduling)
• Monitoring CP
payments and
physical
delivery/acceptance
IT/Systems:
• updating ETS and other relevant systems (e.g. for modeling,
scheduling) and ensuring process runs with minimum disturbance
• Granting access to ETS to relevant personnel and ensuring
restriction of access for relevant staff if necessary
Compliance/Regulatory:
• Keeping abreast relevant legislation and
reporting to Legal, if impact on trading flow
• Monitoring required licenses for traders etc.
Reporting
irregularities
Do docs
need
amending?
INTERNAL AUDIT AND GENERAL MANAGEMENT:
continuous supervision of all processes, compliance with general business decisions/plans, and with any relevant internal policies
Reporting
irregularities
6225-27 September 2019 BOTAS Workshop, Ankara
Thank you for your attention!
Q & A
63
Dr. Jan Haizmann, Managing Director
CORREGGIO CONSULTING Ltd.
93, rue Le Corrège, 1000 Brussels
tel: 32 (0) 472 365 725
j.haizmann@correggio-consulting.euwww.correggio-consulting.eu
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