About ECC 24/04/2013

Presentation ECC

Project „Clearing Services for the

Brazilian Power Market“

Dr. Thomas Siegl – Chief Risk Officer ECC [email protected]

Dr. Götz Dittrich – Head of Clearing Strategy [email protected]

©ECC AG – Any use of information contained in this document is expressly prohibited without prior written consent of ECC AG

ECC overviewHistory

Spin-off of the EEX clearing department to ECC AG

Launch of clearing services for the Dutch Energy Derivatives Exchange (APX-ENDEX)

European Commodity

Clearing Luxembourg S.à.r.l.

Launch of clearing services for the French Energy Exchange Powernext

Start of clearing services for newly launched energy exchanges:

France: EPEX Spot SE

Austria: CEGH Gas Exchange

Integration of Luxembourg-based subsidiary into delivery chain;

Establishment of ECC Lux as agent for deliveries

Clearing services (Spot) for Hungarian Power Exchange HUPX

July 2011: launch of HUPX Futures Market2010

2008

2009

2006

2012Clearing services for Power Exchange Central Europe PXE

clearing start planned for mid 2013

2

ECC OverviewInternational network of markets and products

ECC Clearing of

Power & Gas

in Europe

Power

Power&Gas

New Market

3

Power Power Spot DeliveryPower

Futures

Netherland

Belgium

UK

France

Germany

Switzerland

Austria

Hungary

Romania

Czech/ Slovakia

Gas Gas Spot Delivery Gas Futures

Netherland

UK

France

Germany

Austria

Business Line Products Exchange

EmissionsFutures & Spot: EUA(A), CER

Futures: ERU

Coal Futures: API2, API 4

Options Phelix Power

Market Coupling EMCC/CWE + SL/HU


• Shareholders of ECC are

• EEX 98.5%,

• Powernext 1.5%.

• EEX itself has 40 shareholders,

• majority shareholding with 56% by Eurex / Deutsche Börse

• Shares are also held by market participants

The benefits of clearing to energy marketsClearing house governance follows international standards

• ECC is a CCP acc. to §1,31 German Banking Act

• ECC holds a German banking license

• ECC is a Designated Payment system

• Supervision by Central Bank and German FSA

• Compliance with various international standards

• Management board with dedicated roles and responsibilities

• Supervisory board: supervises the management board

• Risk Committee: advises both boards as independent risk experts

Regulatory

Supervision

Shareholder

Governance

Why a clearing house?Key Differences OTC to Exchange Trading

OTC Trading

Trader 1

Trader 2

Trader 3

Trader 4

Trader 5

Trader 6

Trader 1

Trader 2

Trader 3

Trader 4

Trader 5

Trader 6

Exchange

CCP

Exchange Trading

• Need for counterparty limits

• Limited standardisation

• No transparency

• Limited number of selectable

trading counterparties

• No equality of market participants

• Anonymity (equal treatment)

• Clear rules and price transparency

• Trading with all members of the

exchange (concentrated liquidity)

• Straight-through processing

• Clearing

5©ECC AG – Any use of information contained in this document is expressly prohibited without prior written consent of ECC AG

Necessary for anonymous (exchange) trading

ECC is the contractual partner for both sides

Reduction / Elimination of credit and legal risks

ECC operates a margin system for guaranteed fulfilment

Clearing provides transparency and high operational security

ECC sets the standard which is tailored to the trading practice

Financial and physical settlement services

ECC supports the trading participants and is single point of contact for all clearing & settlement related questions:

24 hours a day, 7 days a week

Reduction of technical interfaces

ECC has established uniform processes & interfaces to a network of partners: Integration of new markets with minimal client effort

Why use Clearing?Rationale

6

No Counterparty Credit Risk

No need to check counterparties for credit quality for credit limits

(all participants collateralize their own credit risk)

Increased number of possible counterparties for trading

(equal access to the whole network of participants)

Existing credit limits are free for other exposures

(e.g. for non standardized contracts)

Increased competition for best prices

Increased number of possible counterparties means more

competition for prices.

Equal treatment of participants generate representative indices

As all counterparties can trade on the same prices, spot price information is

generally valid as an index for derivatives. These price indices are protected

against manipulation and form a reliable basis for long term hedging of market

participants.

Why use Clearing?Advantages of clearing

7©ECC AG – Any use of information contained in this document is expressly prohibited without prior written consent of ECC AG

8

Trading ParticipantNon-Clearing Member (NCM)

Collateral + payment(via Clearing Member)

Delivery(via Registration CCEE)

Trade Registration(via exchange)

ECC

interposes

itself between

buyer and

seller through

„Open Offer“

process

ECC registers physical

electricity deliveries with

CCEE

Conclusion of

exchange trade

or registration of

OTC

transaction

Delivery via entry

and exit contracts

with hub operator

Financial Settlement of trades

+

Posting of Collateral

Contractual Flow with Energy Specifics

9

Trading ParticipantNon-Clearing Member (NCM)

Collateral + payment(via Clearing Member)

Delivery(via Registration CCEE)

Trade Registration(via exchange)

ECC

interposes

itself between

buyer and

seller through

„Open Offer“

process

ECC registers physical

electricity deliveries with

CCEE

Conclusion of

exchange trade

or registration of

OTC

transaction

Delivery via entry

and exit contracts

with hub operator

Financial Settlement of trades

+

Posting of Collateral

Energy specifics- Nomination

- Non Storable Commodity

- Tax implications on

deliveries

- Treatment of balancing

energy

Contractual Flow with Energy Specifics


STP Trade

Interface

Offering integrated, straight-through clearing for OTC, financial, spot and derivatives

• Front end for User Trade Entry

• Automated Trade Import through STP interfaces to exchanges and trade venues

STP Physical

Settlement

ECC is a specialist for the physical settlement of grid-bound energy and emissions

• Technical STP connections to various transmission system operators

• Nominations, scheduling and market coupling for the pan-European Energy

• Full trade anonymity guaranteed in settlement process, ECC steps into delivery.

Efficient Financial

Settlement

Mitigating settlement risks

• EUR settlement via the European Central Bank => in Brazil a Commercial Bank is likely

• ECC is a Designated Payment System i.e. Payments to ECC would be irrevocable =>

similar setup in Brazil

10

Risk Management• Calculate Margins, evaluate risk

• Issue Intraday Margin Calls

Work Flow with Energy Specifics

Default ProcessIn case of failure of financial settlement (default or insolvency) or failure of physical

settlement

• Transfer clients of Clearing Members

• Buy in to replace contracts to ensure smooth functioning for other participants

• Liquidate collateral and use risk management lines of defense

The default scenarioLines of Defense

All figures as of 9th November 2012

• Various layers ensuring a central counterparty protection.

• ECC has a financial resource and collateral pool of more than 1200 mln EUR.

• ECC meets easily international required minimum standards for central counterparties.

ECC Capital (after fund)

25.5 mln EUR

Replenishment104 mln EUR

Member Default Fund 104 mln EUR

ECC‘s share Default Fund 3 mln EUR

Margin Collateral927 mln EUR

Variation Margin and spot settlement

Intraday Margin Calls

Traders guaranteed by clearermore than 300 trading participants (NCM)

Membership acceptance criteria e.g. capital 7.5 mln EUR (Self-Clearer), 30 mln EUR general clearer

Level 1:

Membership

Level 2:

Individual

Liability

(all)

Level 3:

Joint

Liability

(CMs)

Level 4:

Recovery

11

Proven lines of

defense


Summary

• Using a central counterpart provides

• A high degree of security for the market and its participants

• Possibility for anonymous trading

• Support of an exchange as the basis for transparent and reliable trading

and price formation

• Possibility to construct an reference energy price index

• Use of ECC allows for very high and proven efficiency

• Designated Payment System for irrevocability of payments

• Collateral Requirements optimized for efficiency

• State of the art solution corresponding to highest standards including

international regulatory standards as CPSS / IOSCO or FBOT

• Payment cycles being close to the trading and delivery moment reduces

the risk of losses and the necessary collateral deposit requirements

• ECC is acting as a specialized clearing house for energy and energy related

commodities with a deep market knowledge

• ECC has a strong track record in aligning different energy market places with a

high degree of efficiency and transparency

• Support efficient product implementation

Role of a CCP

Role of ECC