Volume 4— Credit Risk Management © Copyright 2002, CCRO. All rights reserved. 31 clearing firm. The processes for OTC clearing are new, and both Nymex and clearing firms are working out the details. Nymex now clears nine natural gas basis contracts and three power products (see Website www.nymex.com for details). Nymex is reviewing a set of new products that should be released in October 2002. All products (physical or financial) are converted to financial swaps with no particular intention to be physically delivered. At contract closure, if a customer has a remaining open position it can ask for either an Exchange for Physical (EFP), where Nymex remains in the middle as guarantor, or an alternative delivery process (ADP), where the customer is matched with a counterparty and delivery credit risk is handled bilaterally. Pricing and MTM data is provided by survey methods to Nymex brokers. The costs to use the service include the clearing fee and clearing firm fees (negotiated by the clearing firm). The clearing fee for a monthly financial Henry Hub contract of 2,500 MMBtu is posted at $0.34 per side. ICE (GCC/LCH): ICE is a trading platform and offers clearing as an additional service to trade matching. ICE emphasizes that it is willing and capable of connecting to any clearing service acceptable to the energy industry. ICE’s strategy for OTC clearing has been directed at the use of existing futures clearinghouses, London Clearinghouse (LCH) and Guaranty Clearing Corporation (GCC), a subsidiary of the Board of Trade Clearing Corporation (BOTCC). The credit risk of a transaction is held by the clearing member firm, and all transaction processing, margining, and settlements are managed by the clearing firm. For ICE, LCH clears Henry Hub natural gas, and GCC will provide clearing for U.S. power products. The guarantee and clearing processes are through the clearing member firm. ICE is currently not involved in the delivery process, though it has described how delivery process will work for physical power transactions. Physical power delivery will be governed by an EEI Master Power Purchase and Sale Agreement, and 100% of the contract value will be held in escrow at GCC through the performance period. The cost of clearing through LCH or GCC will have components from the clearinghouse and the clearing firm. The clearing fee for a monthly (30-day) physical 2,500 MMBTu Henry Hub contract is $0.90 per side. EnergyClear Corp. (ECC): EnergyClear is a CFTC-designated Derivative Clearing Organization specializing in OTC energy clearing. The risk transfer mechanism is based on an extension of the member pool concept, similar to traditional clearinghouses. Therefore, the guarantee that any member receives will rely on industry-standard margin calculations designed to limit risk to a one-day price move, initial and variation margin, member contributions to a guarantee fund, a $100-million bank-syndicated lender-of-last-resort, and ultimately the members themselves. One unique feature of ECC is that it permits energy merchant companies to become direct members and thus affords them the direct credit protection of the clearing system. Also, there are multiple classes of membership, including a “recovery class,” which allows otherwise unacceptable members to participate if they maintain flat positions and other enhanced requirements to protect the clearing system. Product types are flexible and dependent on ECC member designation, margining ability, and guarantee limitations if any. Delivery process will match open positions and ask for delivery margin to cover 100% of the contract value. The exception is that gas contracts will be margined higher in the winter (200%) and power contracts will be margined higher in the summer (200%). The cost to be a member is $100,000 fixed and a $2,500,000 guarantee fund contribution. Clearing cost is $0.000215 /MMBtu,