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 J.Haizmann@efet.org 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 J.Haizmann@efet.org 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: j.haizmann@efet.org www.efet.org Jan Haizmann Istanbul, 22 July 2011 49