February 2006 Market Clearing in the Energy Industry 64 © Copyright 2006, CCRO. All rights reserved. that its solution for clearing an ISO/RTO administered market can reduce collateral requirements by up to 90% for the market, as well as similar reductions in loss mutualization among ISO/RTO participants. Under the NYMEX solution for ISO/RTO administered markets, NYMEX would use its existing structure to clear the ISO/RTO administered markets including using its network of clearing members and daily settlement to manage and mitigate default risk. NYMEX would also provide for set-off and netting of all ISO/RTO market products, as well as all other NYMEX Cleared products (i.e. exchange and Clearport). NYMEX envisions market participants being able to set-off physical gas purchases from physical power sales in the ISO/RTO administered markets, to provide additional substantial benefits to the market. Similarly, NECC, in conjunction with CCorp offers a clearing solution to ISO/RTO administered markets. NECC’s solution essentially converts ISO/RTO settlements across all products into CFC™ contracts that thus enjoy special protection under the bankruptcy code. Because the CFC™ covers all receivables and payables in ISO/RTO markets (albeit RTO/ISO administrative fees are optional), the NECC solution offers complete protection (subject to limitations regarding POLR risks) and the potential to net ISO/RTO positions against other OTC positions in power and gas contracts in all geographic areas served. The NECC solution does not require clearing member intermediaries and, similar to their OTC offering, overcomes objections by investment grade buyers as credit is provided at no cost to them through special facilities with A+ or higher financial institutions with associated fees paid by sellers who opt for early payment (three days after the conclusion of each delivery week.)47 12.4. ICE/LCH Intercontinental Exchange (ICE) is the largest venue for cleared markets on an OTC basis. It launched the industry’s first cleared OTC contracts in March 2002 in partnership with LCH Clearnet. In the last three years ICE and LCH have launched over 30 cleared products, including natural gas swing swaps, basis swaps, peak and off-peak electricity contracts. ICE’s platform provides access to and transparency in the energy markets by showing all posted bids and offers, which provides depth of market information. ICE’s cleared OTC products are shown in the same price stream as bilaterally traded products which allows participants the choice of trading on a cleared or bilateral basis at the time of trade thus optimizing the cost/benefits of clearing or using bilateral credit lines and providing control over credit and capital utilization. The participant clearing a trade pays a fee to LCH Clearnet and to their FCM for the use of clearing, however, there are no additional execution fees above the standard fee charged by ICE. There are currently 23 futures commission’s merchants (FCMs) that handle orders for our more than 1,400 participants in ICE and LCH’s OTC cleared markets. ICE also extends the availability of its cleared products to voice brokers through its block trading facility. Block trades are those trades executed in the voice broker market, typically over the telephone, and then transmitted for clearing. Currently, all ICE/LCH-cleared contracts are financially settled, and none can be taken to physical delivery. The clearing fee for a monthly (30-day) physical 2,500 MMBtu Henry Hub 47 In RTO markets it is intended that net buyers be held neutral to their ‘unsecured limits’ at the RTO as net sellers will either pay the financing by opting for accelerated payment or take a pro-rata share of default risk.