Volume 4— Credit Risk Management © Copyright 2002, CCRO. All rights reserved. 32 $0.01/MWh, and overhead of 2% of transaction cost over time. A monthly 2,500 MMBtu contract would cost $0.54, with no clearing member fees. (Note: EnergyClear has announced that it will make available VMAC’s system of AAA-rated financial guarantees, provided by Financial Security Assurance Inc. (FSA), covering both VaR and Mark-to-Market amounts to members, beginning in 1Q03.) VMAC: VMAC is not a clearinghouse. Instead, it is a system that (1) dynamically measures counterparty VaR (MTM) on each covered bilateral contract in accordance with industry practices (2) provides AAA/Aaa/AAA-rated credit insurance systematically as a financial guarantee of counterparty VaR (MTM) covering both counterparties on each such contract and (3) 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 has chosen not to novate trades and thus remain out of CFTC regulation as a Derivatives Clearing Organization. Its margining system is flexible and is based on VAR principles commonly used in the merchant energy industry. One of VMAC’s major shareholders 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. VMAC will guarantee up to the margin and VaR amount but will not be responsible for liquidation risk or market risk beyond the defined margin and VaR. 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 is covered by the financial guarantee. Therefore, VMAC covers both delivery risk (up to counterparty VaR and MTM) and payment risk. The collateral required to support these risks is calculated on a fully netted basis, extending the benefit of multilateral netting through the delivery and settlement periods. VMAC’s list of product types is diverse and flexible. Its only product limits will be based on data limitations on historical data and forward price curves. Fees for products will vary based on contract value and duration. For instance, a monthly physical 2,500 MMBtu Henry Hub contract would cost $1.50 per side.