Volume 4— Credit Risk Management © Copyright 2002, CCRO. All rights reserved. 28 Figure 5. Simulation of Guaranty Exposure for Bilateral and Multilateral Netting (Source: Analysis by Tractebel and Strategic Decisions Group) Figure 6. Cumulative Probability Distribution of Exposure Reduction with Multilateral Netting (Source: Analysis by Tractebel and Strategic Decisions Group) The challenges facing a clearing service for OTC energy include: • Ability to clear entire set of traded energy products − Settlement prices − Liquidity spread throughout product set (increase liquidation risk in clearing) − Margining (commodity, location, time periods) 0 0 .0 2 0 .0 4 0 .0 6 0 .0 8 0 .1 0 .1 2 0 .1 4 0 .7 5 4 5 .7 5 9 0 .7 5 1 3 5 .7 5 1 8 0 .7 5 P ro b a b ility M u ltila te ra l N e ttin g B ila te ra l N e ttin g G u a ra n ty E x p o s u re M u ltila te ra l n e ttin g re d u c e s th e a ve ra g e g u a ra n ty e xp o s u re , a s w e ll a s th e va ria n c e in th e e xp o s u re . 0 0 . 1 0 . 2 0 . 3 0 . 4 0 . 5 0 . 6 0 . 7 0 . 8 0 . 9 1 7 0 % 7 5 % 8 0 % 8 5 % 9 0 % 9 5 % 1 0 0 % G u a r a n t y E x p o s u r e R e d u c t i o n P r o b a b i l i t y o f E x c e e d i n g 0 0 . 1 0 . 2 0 . 3 0 . 4 0 . 5 0 . 6 0 . 7 0 . 8 0 . 9 1 7 0 % 7 5 % 8 0 % 8 5 % 9 0 % 9 5 % 1 0 0 % G u a r a n t y E x p o s u r e R e d u c t i o n P r o b a b i l i t y o f E x c e e d i n g