February 2006 Market Clearing in the Energy Industry 65 © Copyright 2006, CCRO. All rights reserved. contract is $0.625 per side, if executed bilaterally, and, if novated and cleared via LCH, LCH fees of $0.03 per side are also applicable, as well along with as any clearing member fees. Additionally, ICE has partnered with North American Energy Credit and Clearing Corporation (NECC), and its other strategic partners to provide a physical market clearing solution for its OTC products on ICE’s electronic platform. Further details of ICE and its partnership with NECC are presented in the NECC review, above. 12.5. VMAC Technically, VMAC is not a clearinghouse. Instead, it is an ISDA Swap based system that: • Nets marks to market across products and participants on a daily basis. • Measures counterparty VaR (MTM) on each covered bilateral contract based on VMAC’s VaR methodology. • Provides AAA/Aaa/AAA-rated credit insurance systematically as a financial guarantee of counterparty VaR (MTM) covering both counterparties on each such contract and • Overlays the covered contracts with a liquidation system that replicates the results of conventional clearinghouse netting of collateral required to secure the credit insurance reimbursement obligation. VMAC is an ISDA Swap counterparty, and thus remains out of CFTC regulation. VMAC swaps are settled daily on net positions, and require initial margin (collateral), also based on net and correlated positions. Its margining system is flexible and is based on a VAR methodology. VMAC’s VaR methodology uses predefined inter-commodity and temporal correlations for assessing spread credits, and power/gas spread credits are available depending on the tenor and products, with correlation credits being available from a 1:1 basis for some products, to correlation credits not being available for the nearest 2 or 6 months. One of VMAC’s major stakeholders is FSA, a primary Triple-A rated bond insurer for municipal and asset-backed securities. FSA provides credit enhancements to VMAC customers and insures VMAC-held collateral up to the defined margin amount. In addition to the margin amount, VMAC provides a payment to participants of VaR-based coverage so that the credit insurance for each contract covers gross counterparty VaR for both parties up to the close of the day, prior to the default. VMAC swaps settle daily via the Bank of New York, thereby eliminating accumulation of mark-to-market exposures. In addition to paying out the markes, VMAC guarantees a termination payment capped at the VaR amount, and will not be responsible for liquidation risk or market risk beyond this defined margin. Therefore, the un-netted credit exposure of the participant on each contract is the AAA/Aaa/AAA-rated credit risk of FSA up to the counterparty VaR (MTM) and the original counterparty for any excess. Under the VMAC system, the original counterparty remains the same. During the delivery period, the undelivered balance of the contract enjoys the margin and counterparty VaR that applied during the pre-delivery period. Also, the account payable that results from each day’s delivery