February 2006 Market Clearing in the Energy Industry 3-13 © Copyright 2006, CCRO. All rights reserved. • The trend toward creating industry utilities is also illustrated by the DTCC: early on it consolidated the depository functions of the Depository Trust Company with the clearinghouse, creating a single utility for the industry. More recently, the DTCC has launched services relating to confirmation, matching and settlement of derivatives (Deriv/Serv) and cross-border trades (Omgeo) Euroclear and Clearstream have accomplished similar consolidation of netting pools and creation of utilities. The next major consolidation of netting pools in North America will undoubtedly be the consolidation of exchange-traded derivatives clearing with the clearing of the underlying securities by the DTCC. This will result in a step change in collateral efficiency. Following that is likely to be a consolidation across European and North American geographies. For several years, the North American financial markets were focused on shortening the clearing and settlement cycle. Several years ago it was shortened from five days (so called T+5 clearing and settlement) to three days (T+3 clearing and settlement). The goal was to achieve what many lower volume markets in Europe already have: next- day clearing and settlement (T+1). Under the leadership of the Securities Industry Association and the Bond Marketing Association, a business case was prepared that identified the costs and benefits of T+1 clearing and settlement. While the shortening of the cycle reduced notional credit exposure in the industry dramatically, the high quality of the counterparties rendered this benefit small. As individual market participants could capture these benefits without mandating T+1 clearing and settlement, the industry initiative ended. Today, many financial market participants are working towards achieving T+1 capabilities in order to reduce operating costs rather than credit costs. 3.5. The nature of the challenge in energy With the benefits of market clearing seemingly so apparent, why has adoption of market clearing, specifically in physical power, progressed at a pace slower than many had expected? There are a number of reasons, many particular to specific industry participants: