February 2006 Market Clearing in the Energy Industry 5-34 © Copyright 2006, CCRO. All rights reserved. o Promote effective competition in wholesale power markets in regions with and without voluntary, organized markets. o Encourage the reduction or elimination of seams between organized markets. o Support creation of regional state committees to advise RTOs and ISOs. o Promote transparency of competitive electric and gas markets. o Ensure that mergers and jurisdictional facility sales are consistent with the public interest. Clearing is a direct catalyst for many of the objectives stated above, as it eliminates many of the traditional barriers to entry for interested parties. The resulting enhanced participation generates liquidity to promote competition. Clearing promotes organized market cross utilization by its homogenous matching and settlement characteristics, and transparency is enhanced through more robust markets and better (in some cases mandatory) price reporting. FERC’s Policy Statement on Electric Credit Worthiness Standards 20 (the “Policy Statement”) illustrates continued support for its stated Policy goals. In the Policy Statement, FERC acknowledged the benefits of both accelerated settlements and netting and requested that the ISO/RTO’s initiate processes to reduce credit exposure and minimize default risk by shortening settlement periods, and adopting netting, to the extent practical. Moreover, FERC encouraged ISO/RTO’s to consider other cost effective means to reduce mutualized default risk, including Credit Clearing21. 5.5.2. CFTC Succinctly stated per the CFTC (Commodity Futures Trading Commission) website, “Congress created in the CFTC in 1974 as an independent agency with the mandate to regulate commodity futures and option markets in the United States. The agency's mandate has been renewed and expanded several times since then, most recently by the Commodity Futures Modernization Act of 2000 (CFMA). Today, the CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency, ensuring their integrity, protecting market participants against manipulation, abusive trading practices, and fraud, and ensuring the financial integrity of the clearing process.” The clearing process, while simple in concept, has proven complex in application. The CFTC has authority over these processes, has been supportive in their development, and has made clear agency’s bias toward working with the markets. Recent statements by then acting Chairperson Sharon Brown-Hruska reinforced that market oriented focus. “Now while credit risk management and clearing solutions do not directly prevent manipulation or market abuses, these solutions do help create liquid markets. Liquid and competitive markets enforce market discipline and that is the best defensive against 20 As a result of the Technical Conference on Electric Creditworthiness Standards in July 2004, FERC issued its Electric Credit Worthiness Policy Statement, 109 FERC ¶ 61,186, November 19, 2004 21 109 FERC ¶ 61,186, paragraph 31