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NGX Overview
July 2010
Agenda
• Exchange – Products and Operations
• Capital Structure – Core Security Components
• Margining and Collateral Policies
• Risk Management
• Oversight
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NGX Summary
• Own and operate a wholesale energy Exchange and Clearing House
• Commenced operations in February 1994, headquartered in Calgary, Canada
• Wholly-owned subsidiary of TMX Group Inc.
• Product suite includes:
– Physical and financial natural gas spot and forward contracts deliverable in Canada and USA
– Financial natural gas options for Alberta
– Physical crude oil spot and forward contracts deliverable in Canada and USA
– Financial power forward contracts for Alberta and Ontario
– Ancillary services spot and forward contracts for Alberta (via Watt-ex subsidiary)
• Utilize the Intercontinental Exchange trading platform, alliance with ICE for
Canadian and US gas and power
• Over 2 million cleared transactions, no NGX defaults through 11 Contracting
Party defaults
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Current Natural Gas Product Locations
NGX Products & Services
Financial Products
Physical Products
ATCO N&S
STATION #2
ALBERTA POWER SWAPS
TEP
ALBERTA SWAPS
ONTARIO POWER SWAPS
NGX INTRA-ALBERTA
EMPRESS
CREC
HUNTINGDON
EMERSON/GREAT LAKES
IROQUOIS
ENBRIDGE CDA
PARKWAY
STANFIELD
ST. CLAIR
MALIN
NNG VENTURA
MICHCON
DAWN
NIAGARA FALLS
CHIPPAWA
TCO
DOMINION SOUTH
PG&E CITYGATE
DEMARC
PANHANDLE EAST
EP SAN JUAN
SOCAL CITYGATE
NGPL MIDCONTINENT
EP KEYSTONE
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TGT Z1
NGPL TXOK
TETCO ELA
CG Onshore
TETCO STX
TGT SL
NGPL STX
ANR SE
TGP 800
Transco 85
CG Mainline
Transco 65
TGP 500
HENRY HUB
TETCO WLA
Current Crude Oil Product Locations
NGX CRUDE OIL
Physical Crude Delivery Points
EDMONTON
HARDISTY
KERROBERT
CROMER
MILK RIVER
CUSHING
MIDLAND
ST. JAMES
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HOUMA
CLOVELLY
NGX Exchange Operations
• Oversee the central rules and regulations of the Exchange, the NGX
Contracting Party’s Agreement (“CPA”)
• Enforcement of rules, such as trade-in-error provisions
• Calculate and publish price indices for Canadian natural gas and power
markets for use in derivatives settlement and market price references between
third parties and market participants
• Calculate and publish over 15,000 contract settlement prices each business day
covering over 480 forward curves
• Develop products and markets, working with Contracting Parties to list new
contracts and stimulate liquidity in new markets and product classes
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Agenda
• Exchange – Products and Operations
• Capital Structure – Core Security Components
• Margining and Collateral Policies
• Risk Management
• Oversight
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NGX Clearing Operations
Buyer
$
$
CPA
CPA
$ or Commodity
$ or Commodity
Seller
• NGX Intermediation
– NGX acts as buyer to every seller, and seller to every buyer, for the
purpose of facilitating anonymous trading and clearing
• Private Clearing Operation
– Contracting Parties are not mutually exposed to a failing Contracting
Party’s default
• Hybrid Model
– Operate futures market principles tailored to cash/forward products
(futures/forward settlement and margining differences)
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• Central, Standard Agreement
– All NGX participants sign a single uniform version of the NGX
Contracting Party’s Agreement
Key NGX Clearing Statistics
• 220+ Contracting Parties (“CP’s”), member firms who have executed the
standard Contracting Party’s Agreement (“CPA”)
• Over $6 Billion CAD equivalent in transactions processed monthly
• Average $1 Billion CAD equivalent in net settlement each month
• Physically settle over 25 Bcfd of physical natural gas and 4 Million Bbls of
crude oil monthly on average
• Financially settle over 6 Million MWhs monthly on average
• Peak collateral held of $4.4 Billion CAD equivalent, average over $2.9 Billion
in 2010
• Processed three CP liquidations in 2008, all resolved with no losses to NGX
or any CP’s, eight total defaults in NGX history also resolved with no losses
to NGX or any CP’s
• No liquidations in 2009 or 2010
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Capital Structure
NGX Guarantee Fund (USD$100MM CIBC Mellon Trust)
Defaulting Party Collateral
(100% Coverage Under NGX Exposure Model)
Deposit
Agreement
Deposit
Agreement
Settlement Banking Credit Facility
$
$
Payer
Payee
$ or Commodity
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$ or Commodity
Physical Backstopping
Guarantee Fund
• Structure
– Fund is comprised of a TD Bank letter of credit for USD $100MM, LC
backed by TMX Group
– LC held in trust by CIBC Mellon Trust, who acts as Escrow Agent to carry
out default functions under the deposit agreement
• Access
– All CP’s are parties to the Deposit Agreement and are eligible to file claims,
NGX cannot submit a claim to draw against the fund
– In the event that NGX should default on a CP, that CP may make a claim
on the fund
– If the claim is uncontested by NGX, the Escrow Agent will pay the CP
directly from the fund
– If the claim is contested by NGX, the matter is sent to mediation and
arbitration, Escrow Agent then directing payment based on the decision
– In the event that multiple claims are filed in excess of the value of the fund,
trustee will determine payments on pro-rata basis
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Agenda
• Exchange – Products and Operations
• Capital Structure – Core Security Components
• Margining and Collateral Policies
• Risk Management
• Oversight
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Contracting Party Performance Obligations
• Make/Take Delivery
– NGX is exposed to the price at which an alternative supply/market can be
found
– Risk is managed with backstopping contracts, penalty mechanisms,
liquidation provisions, and a continuous mark-to-market system
• Payment
– NGX is exposed to receivables risk on settlement dates
– Risk is managed with penalty mechanisms, collateral requirements and
liquidation provisions
• Provision of Collateral
– NGX is exposed to the risk that CP’s will not provide sufficient collateral to
manage their respective risks
• Solvency
– Risk is managed with margin triggers and liquidation provisions
– NGX is exposed to the risk that Contracting Parties remain solvent and can
perform all the above obligations with interruption
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Margin Desk Operations
• Margin Triggers
– Margin requirement reaches 80% of collateral on deposit a margin call
is made with next-business day requirement
– Margin requirement reaches 90% of collateral on deposit and ability to
enter into new positions or grow existing positions is restricted
– Margin requirement reaches 95% of collateral on deposit and all
trading is halted and rights to invoke liquidation procedure are
activated
• Liquidation
– On default, NGX is entitled to invoke liquidation procedure
– Involves offsetting all open positions in the portfolio of the defaulting
CP through the “sale” of the portfolio
– All liquidated damages are paid from the defaulting CP’s collateral on
deposit
– CP is terminated following liquidation
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Components of Margin
• Accounts Receivable
– A calculation of the value of commodity delivered
– Margin requirement increases if commodity is taken prior to
payment, and decreases if commodity is delivered prior to
payment
• Variation Margin (Mark-to-Market)
– A calculation of the price at which a forward position could be
instantaneously liquidated given current market prices
• Initial Margin
– A calculation of the probability of a movement in market prices
during a two-day holding period
– Initial margin coverage protects against a prolonged liquidation
•
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AR + VM + IM = Margin Requirement which must be collateralized
Collateral Management
• Collateral Policy
– CP’s must have sufficient collateral to cover their Margin Requirement,
utilizing any combination of the forms of collateral and offsets below
– Collateral is held to support the CP’s traded positions and can only be used
to remedy a performance failure by the Contracting Party itself
• Collateral Requirements
– Collateral is accepted in the form of cash and irrevocable standby letters of
credit from an A or higher rated bank, in both USD and CAD denominations
– Letters of Credit are restricted by underwriting bank at the discretion of
NGX, based on creditworthiness and payment drawdown history
– Collateral is also deemed from accounts payable credits (representing net
sales delivered) at certain times and from positive variation margin
• Warehousing
– Cash collateral is held in segregated overnight money market accounts at
TD bank, earning interest
– Original letters of credit are held by TD for safe keeping
– Cash remains an asset of the CP through the Collateral Agreement and
associated Undertaking with TD Bank
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Agenda
• Exchange – Products and Operations
• Capital Structure – Core Security Components
• Margining and Collateral Policies
• Risk Management
• Oversight
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Adequacy of Financial Safeguards
• Margin Back Testing
– NGX performs quarterly back-testing of margin rates to determine if the
number of actual price movements beyond the margin rate exceeds the
expected number of exceptions
• Margin Stress Testing
– NGX performs quarterly stress-testing of margins to ensure that at extreme
levels of price stress (up and downward curve fluctuations of 25 to 100
percent) that the financial safeguards in place are adequate to cover any
un-margined potential losses
• Procedures
– In the event that a back-testing scenario leads to more exceptions than the
model anticipates, margin rates are increased
– In the event that a probable stress scenario would cause the emergency
fund to be inadequate, NGX must take a course of action including any or
all of increasing margins, instituting lower position limits, or increasing the
Guarantee Fund
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Insolvency, Netting and Legal Risk Management
• Eligible Financial Contracts (EFC’s) in Canada
– NGX products are “derivatives” within the EFC rules
– Have all the “hallmark” features of EFC’s as set out in Blue Range and
Androscoggin case law, including acceleration, termination and netting
– Results in NGX being able to rely upon its rights under the CPA with
respect to collateral, netting and liquidation
• FDIC Improvement Act of 1991 in the US
– As a Derivatives Clearing Organization, NGX is protected in the US by the
Federal Depository Insurance Corp. Improvement Act of 1991
– DCO collateral and netting terms and conditions are given priority over
insolvency legislation in settling claims
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Agenda
• Exchange – Products and Operations
• Capital Structure – Core Security Components
• Margining and Collateral Policies
• Risk Management
• Oversight
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Oversight
• Settlement Bank
– TD Bank, NGX’s Clearing Bank, maintains day-to-day operational oversight
of NGX clearing operations to support credit facility, CAD $300MM daylight,
CAD $20MM demand, USD $100MM LC
– Clearing Bank controls segregated collateral accounts
– Clearing Bank authorizes movement of funds from collateral accounts
– Clearing Bank has full access to NGX trade/clearing data and reporting,
ensures collateral accounts are sufficient to manage Contracting Party
margin requirements
– NGX will facilitate 1-on-1 meeting with CP and TD to confirm and
corroborate risk management practices undertaken by TD Bank
• TMX and Financial Audit
– NGX is audited through TMX internal audit function, segregated and armslength from NGX audit
– Variation margin and trade payables/receivables on NGX financial
statements as audited through regular financial audits, fall under CEO/CFO
certification policies
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Oversight - Regulatory
• Canada
– NGX is an Exchange and Clearing Agency as recognized by the Alberta
Securities Commission
– Subject to core principles of the order, including maintenance of adequate
financial resources, rule enforcement, and enforcement of participant
eligibility standards
– Reporting requirements ranging from immediate notification to quarterly
and annual reporting
– Regular audits conducted to ensure compliance, including requirement for
external risk review every three years
• United States
– NGX is a Derivatives Clearing Organization as recognized by the
Commodity Futures Trading Commission
– Must follow the reporting requirements, and will be part of CFTC audit
program to ensure compliance with application and DCO order
requirements
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_____________________
Natural Gas Exchange Inc.
Suite 2330, 140 - 4th Avenue SW
Calgary, Alberta
Canada T2P 3N3
Phone:
403.974.1700
Fax:
403.974.1719
www.ngx.com
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