February 2006 Market Clearing in the Energy Industry 7-44 © Copyright 2006, CCRO. All rights reserved. come to dominate the marginal benefits of clearing service innovation. When this happens consolidation of energy clearing solutions will begin. The recommendation to regulators of the industry is to take action to facilitate competition while preparing the legal landscape to support the consolidation of fragmented netting pools. This could require special arrangements under anti-competition regulation. Regulators should take actions to engender competition while setting up a natural, market-based mechanism for determining when the benefits of consolidation produce more benefits for clearing participants that the benefits of competition. 7.5. Other regulatory considerations • Regulators, including state and Federal authorities, regional coordinating councils and the ISO/RTOs themselves, should encourage the design and development of market and market products that may create opportunities to settle and clear among various ISO/RTO/Transco operations. This would lead to more efficient use of capital and collateral mitigating credit risk throughout the industry • Regulators, particularly state regulators, should acknowledge that risk management opportunities arise by including settlement and clearing in the design and structures of load based auctions, requests for proposals or bidding processes that may provide for better mitigation of credit risk and collateral exposures. • Recognition and broader used of FDICIA Regulation EE34 to the extent that a counterparty may be eligible. Regulation EE provides that, subject to limitations, netting agreements among financial institutions and clearing organizations will be enforceable notwithstanding bankruptcy or receivership. • Solutions to mitigate regulatory risk associated with any clearing solution need to be developed. Development of cleared markets would be negatively impacted if clearing solutions bear unlimited risk (i.e. amount of time a POLR obligation would need to be serviced). Solutions such as sunset clauses need to be considered by clearing solutions and other relevant stakeholders as ways to mitigate this risk. 34 The Federal Deposit Insurance Corporation Improvement Act of 1991, Regulation EE, 12 CFR Part 231.