Best Practices for Energy Price Indices © Copyright 2003, CCRO. All rights reserved. 11 IV. INDEX CONSTRUCTION PROCESSES AND METHODOLOGY The Committee of Chief Risk Officers believes the processes and methods presented here are best practices for constructing an index. 4.1 Index Developer Best Practice Processes and Methods 4.1.1 Precise Index Definition The index developers should carefully define the product, delivery location, and commodity type. In particular, the index developer should disclose what hubs are included in a given index. For example, smaller hubs surrounding a major hub may be consolidated into the larger hub’s index calculation because of the small number of data submissions. These definitions need to be well documented and publicly available to data providers and index users. 4.1.2 Establish Transaction Cutoff Times The index developer, after consultation with the data providers, should determine the exact time interval for which transactions will be included for a certain index. This time interval will generally be index, product, and market specific. Transactions executed before the transaction start time or after the transaction cutoff time should not be included in the data submitted. This time interval, as well as the protocol surrounding it, should be uniform across all data providers to a given index. For example, for a daily price index the time interval may start at the commencement of trading for the underlying commodity/product and end at the defined cutoff time for the given index. All transactions done during this interval will be included in the data set submitted to the index developer. All transactions done subsequent to the cutoff time will not be submitted. For a monthly index, the selection criterion may be different. For example, in the case of first-of-the- month indices for natural gas, when data is submitted on a daily basis during bid-week, transactions executed after the daily cutoff time should be included in the following day’s submission. Transactions entered into after the cutoff time on the last day of bid-week should not be submitted. 4.1.3 Establish Deadline for Data Submission In addition to the cutoff time for trades reported, a deadline for the submission of data should be set. This data submission deadline should also be agreed upon between the data providers and index developers. There should be no less than two hours between the transaction cutoff time and the data submission deadline to allow for the designated noncommercial group to validate the data. 4.1.4 Establish an Error Resolution Process – Prior to Index Publication The index developer should review the data received for errors and verify suspect data with the respective data providers before index publication. The data providers’ designated noncommercial groups will make reasonable efforts to address any issues raised by the index developers in a timely manner. Similarly, if the data provider discovers errors including missing trades in the data