The EFET General Agreement

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Standardisation as Key Requirement for OTC Trading in
Turkey & Basics of the EFET General Agreement Gas
PETFORM EFET Workshop
20 May 2014, Ankara Turkey
European Federation of Energy Traders
Dr. Jan HAIZMANN LL.M.
Legal Committee Chairman,
Member of the Board
[email protected]
Jan Haizmann
18 September 2012
1
EFET Structure
EFET Deutschland
Members
EFET Members
EFET Deutschland
Board
Membership Committee
Oversight Committee
Board
Secretariat
Finance & Treasury
Process
Standardisation
Committee
B.O.
Group
BPOC
TF CpML
IT
Architecture
Legal Committee
Legal Opinion
Review
LC TF Coal
Doc.
Gas Committee
TF Market
Supervision
TF VAT/Tax
Credit Risk TF
Clearing & Collateral
eSM PwG
TF Hub/Gas
Doc
TF EU Collateral
Reform
LC TF Gas Appendix
eXRP TF
eCredit Matrix TF
Payment Netting PG
Secure Data Exch.
Gas Hub
Development
LNG PG
German TF Gas
(GTFG)
TF CEE-E
TF Renewables
TF Iberia
TF
Switzerland
Mrkt based balanc.
Info. Transp. PG
TF Emissions
Trading
WG Capacity Allocation
TF France
Capacity PG
LC TF CEE/SEE
TF
German TF
Electricity (GTFE)
WG TR
LC TF Res
eCM PwG
TF CEE-G
Electricity
Committee
TF Italy
Intraday PG
TF BeNe-G
WG Balancing
Dodd-Frank
TF Turkey
www.efet.org
Why Contractual Standardisation?
 Or how things can go wrong …
Jan Haizmann
Warsaw, 29th March, 2010
5
Standardisation allows Risk Managment
 Energy Traders need One Agreement across many
countries to effectively manage their legal risks
 EFET Agreement offers international proven (!)
standard solution accross many jurisdictions
 Insular solutions lead to delay in product
standardisation and create obstacles for market
developments
 Standard products allow liquidity in trading and
pricing is based on standard conditions
Jan Haizmann
Warsaw, 29th March, 2010
6
Standardisation = Engine for Liquidity
Jan Haizmann
Istanbul, 22 July 2011
7
Energy Trading = International Business
Quelle: EEX
Dr. Jan Haizmann
Berlin, 17.1.2012
8
Summary...
No Standard Contractual Terms
=
No OTC Market in any Commodity
Dr. Jan Haizmann
Berlin, 17.1.2012
9
Agenda
 EFET Vision of Standardisation
 Physical Commodities Trading Agreements
 The EFET Gas Master Agreement – why use it?
 Basic Mechanics EFET Gas Master Agreement
 Why does Turkey need Standardisation
 Q&A
Jan Haizmann
Istanbul, 22 July 2011
10
OTC Trade as Continuous Processs
Many Products = Same Contractal Terms
Jan Haizmann
Istanbul, 22 July 2011
11
The Challenge: “right” agreement for each
type of transaction
EFET Gas and EFET
Power cover continental
gas, power and
emissions with physical
settlement
ISDA covers a wide
scope of financial
products, including
commodities
IETA offers standard
documentation for
emissions trades
EFET does not provide
for cash settlement
Jan Haizmann
Istanbul, 22 July 2011
12
The ISDA Master Agreement
ISDA MASTER
AGREEMENT
Physical Power Annex
• Grid Trade Master
Agreement (GTMA)
Annex
Physical Gas Annex
2005 Commodity
Definitions
• North American Power
Annex
• European Gas
Annex (NBP and
ZBT*)
• North American Gas
Annex
Schedule
Physical Emissions
Annex
• EU Emissions
Allowance Annex
Physical Coal Annex
• Global Physical Coal
Annex
Confirmations
*out of date
Jan Haizmann
Istanbul, 22 July 2011
13
Physical Commodity Trading Agreements
Power UK
Gas and
Power
GTMA
IETA
EFET Master
Agreements
(Emissions)
Bespoke
Coal
LNG
Master
SCoTA
Precious
Metals
Lease
Jan Haizmann
Emissions –
now mainly
used for spot
Istanbul, 22 July 2011
Precious
Metals
14
The EFET Master Agreement
EFET Individual
PRISMA Gas
Credit
Capacity
EFET GENERAL
Support
Annex
AGREEMENT
Power
Gas
Emissions
TTF (Netherlands)
ZBT (Belgium)
NBP (UK)
Allowance
Annex
Contract
Election
PSV (Italy)
Sheet
PEG (France)
Austrian VTP
Gaspool (Germany)
Confirmation
PSV (Italy)
UK Beach
Polish VP Appendix
Jan Haizmann
Istanbul, 22 July 2011
15
EFET AGREEMENT SHOULD BE USED HERE...
Reference: PwC – Liberalization Effects on Turkish Energy Market – 2011 Nov 18 –
Istanbul Traders Event – Slide 3
Jan Haizmann
Istanbul, 22 July 2011
16
Jan Haizmann
Istanbul, 22 July 2011
17
FET Gas Master Agreement: – is used mainly here…
Advantages of the EFET Master Agreement
Standardisation
Credit Protection
Insolvency Protection
Ensures smooth operational processes and avoids
back to back risks; allows for speedy negotiations and
high volume trading
Credit clauses allow parties to monitor each other’s
creditworthiness over time
Close-out netting and single agreement character to
avoid cherry picking by liquidator
Legal certainty
Endorsed by EFET Legal Committee and
supported by legal opinions in various
jurisdictions
EFET General Agreement
I. Introduction
Advantages of Master Agreements
 contractual / legal framework
 simplification / standardisation
 meeting on an equal footing
 payment netting
 close-out netting
 credit risk management
Enables to focus on the trading business
Jan Haizmann
Istanbul, 22 July 2011
20
EFET General Agreement
I. Introduction
The EFET General Agreement
 developed by EFET in 2000 with the objective of:
 balanced position of the Parties, big or small, seller or buyer
 suitable for all local power trading markets
 shall cover the whole power trading business of the Parties
 shall fulfill all regulatory requirements to a standard document
 accepted and established as a “Standard” across Continental Europe
EFET facilitates the speedy negotiations
Jan Haizmann
Istanbul, 22 July 2011
21
EFET General Agreement
II. Contractual Structure
General
Agreement
(“main body”)
› Who can use it as a Party?
traders, generators, suppliers, grid operators, customers, having access to the grid
› Products:
standard physical power products (base/peak, intraday, spot, forward),
non-standard physical power products or physical power options as well
Jan Haizmann
Istanbul, 22 July 2011
22
EFET General Agreement
II. Contractual Structure
General
Agreement
(“main body”)
Election
Sheet
› Election Sheet (contains the results of the negotiation between the Parties):
› Clauses marked („...unless otherwiese specified in the Election Sheet…“) in
the main body have to be customised.
›
Jan Haizmann
Any other clause may be customised.
Istanbul, 22 July 2011
23
EFET General Agreement
II. Contractual Structure
General
Agreement
Election Annexes &
Election
Sheet
Sheet
Appendices
(“main body”)
› Annexes (part of the General Agreement by default):
Definitions, Confirmation templates
› Appendices (optional, selection):
Credit Support Annex (bilateral Margining),
Allowances Appendix (Emissions Allowances)
Jan Haizmann
Istanbul, 22 July 2011
24
EFET General Agreement
II. Contractual Structure
Individual Contract
General
General
Agreement
Agreement
(“main
(“main body”)
body”)
Individual Contract
Election
ElectionAnnexes
& &
Election
Annexes
Sheet
Sheet Appendices
Sheet
Appendices
Individual Contract
Individual Contract
Individual Contract
single agreement concept (§ 1)
Jan Haizmann
Istanbul, 22 July 2011
25
EFET General Agreement
II. Contractual Structure
Individual Contract
General
General
Agreement
Agreement
(“main
(“main body”)
body”)
Individual Contract
Election
ElectionAnnexes
& &
Election
Annexes
Sheet
Sheet Appendices
Sheet
Appendices
Individual Contract
Individual Contract
Individual Contract
priority (§ 2.2)
Jan Haizmann
Istanbul, 22 July 2011
26
EFET General Agreement
III. Essential provisions of the Agreement
Legal
RISKS
Operational
Jan Haizmann
Credit
Istanbul, 22 July 2011
27
§3 Concluding and Confirming Individual
Contracts
The contract can be concluded in any
form of communication
Contract becomes legally binding from the time
the commercial terms are agreed
Confirmation merely documents an agreed transaction;
standard confirmation templates
Many companies send Confirmation for each
transaction (regardless of whether they are Seller
or Buyer); electronic matching for flow deals common
§ 3.4: Only very few companies maintain authorised
trader lists (administratively too burdensome)
Jan Haizmann
Istanbul, 22 July 2011
28
§ 4 Primary Obligations – Delivery and
Acceptance
Jan Haizmann
Seller
• Obligation to Schedule and
deliver the Contract Quantity at
the Delivery Point
Buyer
• Obligation to Schedule and
accept the Contract Quantity at
the Delivery Point
Istanbul, 22 July 2011
29
§5 Options
Provides for definition of simple Put and Call option
Premium payable on
5th Business Day unless otherwise agreed
If Option is exercised verbally it requires confirmation
in writing
No automatic exercise
Jan Haizmann
Istanbul, 22 July 2011
30
§ 6 Delivery, Measurement, Transportation
and Risk
Measurement of gas in
accordance with nomination and
allocation arrangements at the
Delivery Point
Seller represents that it has
right to transfer to Buyer full
entitlement to the gas, free and
clear of encumbrances
Seller bears risk and bear all
costs up to the Delivery Point,
Buyer at and from the Delivery
Point
Jan Haizmann
Istanbul, 22 July 2011
31
§ 7 Risk and Force Majeure
An event beyond reasonable
control of Party claiming Force
Majeure
that it could not reasonably have
avoided or overcome
makes it impossible for the
claiming party to perform its
delivery or acceptance
obligations
Jan Haizmann
Istanbul, 22 July 2011
32
§ 7 Force Majeure
Interruption or curtailment of gas
flows as a result of
Transportation Failure – 2 legs:
Beyond the reasonable control
of the party claiming FM
Beyond reasonable control of TSO
which could not reasonably have
been avoided or overcome by it and
which makes it impossible for TSO
to fulfil its obligations (delivery and
acceptance of Gas)
Jan Haizmann
Istanbul, 22 July 2011
33
§ 7 Force Majeure
Planned and unplanned Maintenance is included in Force Majeure unless the
maintenance has been notified prior to entering into the Individual Contract
Obligation to notify and mitigate effects of Force Majeure
Long Term Force Majeure -> Walk-away!
3 months ˂ Z x 90/365 ˂ 1 year or 50% of contracted quantity
EFET Gas Force Majeure standard is generally not amended in order to avoid back to
back risks!
Jan Haizmann
Istanbul, 22 July 2011
34
§ 8 Remedies for Failure to Deliver and Accept
Failure to deliver
• (Contract Price – Market
Price) x Default Quantity
+ incremental
transportation costs and
other reasonable and
verifiable costs and
charges incurred by
Buyer
• (Contract Price – Market
Failure to Accept
Payment in
accordance with § 13
Jan Haizmann
Price) x Default Quantity +
incremental transportation
costs and other reasonable
and verifiable costs and
charges incurred by Seller
• 20th of M + 1 or 10 days
following receipt of invoice,
whichever is later
Istanbul, 22 July 2011
35
§ 8a Off-Spec Gas
Delivery of Off-spec
Gas constitutes
Underdelivery
Seller to ensure that
Natural Gas conforms
to Transportation
Requirements
Indemnity against
direct loss, damage
and expense resulting
from Off-Spec gas
(unlimited)
Jan Haizmann
Istanbul, 22 July 2011
36
§ 9 Suspension of Delivery or Acceptance
Suspension right only available if a) failure to pay or b) failure by Credit Support
Provider to provide, replace or increase guarantee
3 Business Days prior notice required
Non-defaulting Party’s right to
a) Suspension of delivery or acceptance of Natural Gas and
b)
Jan Haizmann
Withhold payments owed to Defaulting Party
Istanbul, 22 July 2011
37
§ 10 Termination for Material Reason
If Material Reason with respect to a Party has occurred and is continuing, the
other Party may terminate the Agreement by giving the other Party notice
Notice of Termination for Material Reason orally or in writing if confirmed in
writing within 2 Business Days. Notice MUST specify the reason for
termination
Termination to be effective at terminating party’s choice on any day between
day on which termination notice has been received and 20 days after such day
Automatic Early Termination in the event of Insolvency required by some
jurisdictions -> Early Termination Date for all Individual Contract occurs
immediately and automatically
Jan Haizmann
Istanbul, 22 July 2011
38
§ 10 Termination for Material Reason
INSOLVENCY EVENT:
Law of the incorporation of counterparty
applies not law chosen to govern Agreement
Close-out netting enforceable? EFET
provides up to date netting opinions
TERMINATION AMOUNT: Calculation in
accordance with §11
Costs – (Losses + Gains)
No replacement transaction required
Jan Haizmann
Istanbul, 22 July 2011
39
Close-Out Netting - a reminder
Close-out netting is process by which, following an early
termination of the Agreement:
open transactions between two parties are terminated;
each terminated transaction is valued; and
all the termination values, together with any unpaid amounts, are reduced to
a single net amount owed by one party to the other.
 Reduces Credit Risk
– can reduce exposure in close-out as exposed only up to the net amount of
mutual obligations
– can reduce collateral-posting requirements by netting collateral
requirements across agreements
 Expands Credit Lines
 Reduces Regulatory Capital Requirements
–regulators are willing to require a lower amount of capital to cover
transactions if netting arrangements are in place
Jan Haizmann
Istanbul, 22 July 2011
40
§ 14 Taxes
All taxes up to the
Delivery Point for
account of Seller,
at and after
Delivery Point for
account of Buyer
Jan Haizmann
EU is now
implementing reverse
charge mechanism
For Turkish market a
warehousing solution
is needed
Wholesale Market
exempt from VAT
No VAT
Istanbul, 22 July 2011
NO STAMP DUTY
41
§ 16 Credit Support
Assurance
§ 17 Performance
Parties may on Effective Date or upon
entering into Individual Contract agree on
Credit Support (PCG, bank guarantee,
cash etc. ); Credit Support Annex
If a Material Adverse Change in respect of
other Party has occurred (subjective
standard but good faith) the other Party
has the right to request Performance
Assurance
Material Adverse Change: EFET provides
for defined list of events (see next slide)
but some parties expand list (e.g. add
ISDA like language)
Letter of Credit, cash or other security
reasonably acceptable to other Party
Jan Haizmann
Istanbul, 22 July 2011
42
§19 Assignment
Neither Party has right to assign its rights and/or transfer its obligations to a third
party without prior consent. Consent not to be unreasonably withheld
Election: Assignment to Affiliate without consent if
a) Of the same creditworthiness and
b) Is incorporated in the same jurisdiction
Jan Haizmann
Istanbul, 22 July 2011
43
§21 Representations and Warranties
PRINCIPAL
POWER TO
EXECUTE
ACTING FOR ITS
OWN ACCOUNT
NO INSOLVENCY
ENTITY DULY
ORGANISED
LICENCES,
GOVERNMENTAL
AND REGULATORY
APPROVALs
Jan Haizmann
PRINCIPAL LINE
OF BUSUINESS
Istanbul, 22 July 2011
44
§22 Applicable Law and Jurisdiction
Option A: English Law and Arbitration at
London Court of International Arbitration
Option B: German Law and Arbitration at
German Institution of Arbitration
Some parties agree on ordinary courts
e.g. English courts
If other law applied prior legal review
required!
Jan Haizmann
Istanbul, 22 July 2011
45
EFET Gas and Gas Hub Terms
Vitual Point
Physical Hub
 No Hub Terms required,
 Physical delivery at Hub
 Use of the EFET Gas for
 Requires Appendix
any paper transactions
Jan Haizmann
Istanbul, 22 July 2011
46
Gas Appendices for Virtual Trading Points and
Hubs
TTF (Netherlands)
ZBT (Belgium)
NBP (UK)
AOC (Spain)
PSV (Italy)
PEG (France)
Austrian VTP
Polish VP
Gaspool (Germany)
UK Beach
Area D - Norway (in preparation)
Jan Haizmann
Istanbul, 22 July 2011
47
Aim:Trading
Euractiv
Italy’s Conference
without
“Diamo voce all’Italia in Europa”
Rome,borders
17 October 2011
th
European Federation of Energy
Traders
Giving voice to Italy in Europe:
The EFET contribution
Jan Haizmann
Director of the EFET Brussels
EU Liaison Office
[email protected]
Jan Haizmann
Rome, 17th October 2011
48
Thank you for your attention!
European Federation of Energy Traders
EU Liaison Office
Rue Le Correge 93
1000 Brussels
Tel: +31 (0)20 5207970
Email: [email protected]
www.efet.org
Jan Haizmann
Istanbul, 22 July 2011
49
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