February 2006 Market Clearing in the Energy Industry 63 © Copyright 2006, CCRO. All rights reserved. Costs for the various NCC services as presently outlined are presented in Appendix F. 12.2. NYMEX OTC Cleared Markets NYMEX offers a clearing process to convert bilateral OTC traded products to NYMEX ClearPort® regulated futures contracts, via novation. NYMEX offers two ClearPort platforms, ClearPort Clearing and ClearPort Trading. ClearPort Clearing is NYMEX’s clearing only platform, which is primarily used by OTC voice brokers to eliminate customer counter-party credit risk. ClearPort Trading is NYMEX’s electronic trading and clearing platform. In the last three and one-half years, NYMEX has expanded its product slate by more than 180 new contracts, principally through its ClearPort platform. NYMEX now clears 70 natural gas contracts, as well as 37 electricity contracts. In 2004, over 14.5 million contracts cleared through ClearPort. Year to date through October 2005, over 28 million contracts have cleared through ClearPort. The ClearPort products are financially settled with the exception of the PJM, Mid Columbia, and Palo Verde physically settled electricity futures. Upon two counterparties agreeing to novate a position to NYMEX via its ClearPort products, the Exchange becomes guarantor to the performance under the contract (provided that for physically settled contracts NYMEX is not the guarantor or otherwise the counterparty during the delivery period), and the original counterparties post initial margin on the novated positions. The novated positions are marked daily by the exchange and clearing members collect or pay the variation margin on behalf of the original counterparties daily. The customer credit risk of a position is held by the clearing member firm, which is responsible for customer transaction processing, margining, and settlement processes. Upon the contract expiration, the original counterparties to the novated transaction are closed out of their positions, initial margin is returned, and the contract is cash settled. With the previously referenced physically settled ClearPort electricity contracts, as with other NYMEX futures that include physical delivery provisions, customers have the following choices related to contract closure: position closure by offsetting trade, an Exchange for Physical (EFP), which allows closure on customer defined terms, or after the standard delivery match, an alternative delivery procedure (ADP). Under the EFP and the ADP provisions, the contract positions are no longer protected by the exchange standard delivery rules and protections. Daily price information is obtained from OTC brokers, other commercial sources, and current transactions are used for daily mark-to-market processes. The costs to use the service include the NYMEX clearing fee and clearing firm fees (negotiated by the clearing firm), as well as any broker fees. For natural gas basis contracts, the NYMEX per side clearing fee ranges from $.34 for the Henry Hub basis to $.67 for all other natural gas basis contracts. All ClearPort natural gas basis contracts are 2,500 MMBtu. For the ClearPort electricity contracts, the clearing fee is $.005 per MWh. 12.3. ISO/RTO Administered Markets As well as its expanding Clearport portfolio, NYMEX, through its partner Accenture, has been marketing a clearing solution to the ISO/RTO administered markets. NYMEX data suggests