Volume 4— Credit Risk Management © Copyright 2002, CCRO. All rights reserved. 29 − Options • Delivery process and performance guarantees • Legally enforceable contracts and bankruptcy protection • Operational challenges of trade entry (where is the trade source), and clearing confirmation • Commitment of participation by merchant energy industry • Collateral types and centralized management of collateral It is critical that all companies in the industry that are interested in clearing ensure that their processes, policies, and procedures are modified to incorporate this new practice. Clearing of transactions will affect all areas of the trading floor, from front office, through confirmations, to middle office recording and back office settlements. It is especially important today for companies to understand how the process of novating existing positions into a net cleared position will occur. Advisory firms are working with clearing platforms to develop tools to standardize the process of establishing clearing as a practice. Companies may either adopt one of these standardized approaches or adopt their own procedures, but they should do one or the other without delay. As part of the CCRO’s forum on multilateral clearing opportunities, we have developed a list of the criteria that potential users may use to analyze platforms and ensure they are providing a service that optimizes the benefits available. This list of attributes for analytical comparison across multilateral clearing platforms (“platforms”) follows. Attribute 1: Stimulates competition/stability/liquidity ― This attribute rates a platform on its legal enforceability. Legal enforceability can be demonstrated primarily through approval by the CFTC and secondarily through any other relevant legal approvals. These legal approvals are an important indicator that the platform will stimulate competition, stability, and liquidity, based on the premise that such approvals increase members’ confidence that the platform will effectively protect their interests. Attribute 2: Default mechanisms ― This attribute evaluates how the platform will protect members from the risk of individual defaults, as well as the potential for multiple simultaneous or associated defaults. Included within this attribute is consideration of capital adequacy or other means of ensuring capital integrity to protect against the risk of defaults. Attribute 3: Readiness ― This attribute rates a platform on two items related to readiness. First, it evaluates the ability of the platform to seamlessly connect with current business processes (i.e., compatibility with existing IT systems, current methods of operation, and current product definitions). Second, it evaluates whether the platform is ready for use or, if not, how much additional building, testing, and investment is required for the platform to become operational. Attribute 4: “All-in” costs of service ― This attribute rates a platform on capital start-up costs for members, as well as ongoing margining requirements. In addition, it rates the extent to which a platform has established clear and well-documented rules for capital and margining.