Potential Credit Policy and Other Enhancements Kevin King Manager, - PowerPoint PPT Presentation

Potential Credit Policy and Other Enhancements Kevin King Manager, Credit & Corporate Insurance Credit Working Group Conference Call March 28, 2013

Agenda • Introductions • Potential under-collateralization risk when Estimated Aggregate Liability is increasing in a way that necessitates collateral calls over several consecutive business days • Upcoming changes to Officer Certification Form • Opportunity for market participants to request additional, on-line credit data such as what’s currently provided through the Market Participant Portal • Wrap-up Slide 2

An under-collateralization risk exists if a market participant’s EAL increases in a way that necessitates collateral calls over several consecutive business days. • According to current tariff provisions, Aggregate Credit Limit (“ACL”) may already trail Estimated Aggregate Liability (“EAL”) by two business days while allowing the market participant time to post. • Even in the event of timely posting of additional collateral, in an increasing EAL scenario, the ACL could trail EAL for an extended period of time increasing the risk to market participants of insufficient collateral to cover a payment default. • Since the ISO has no way of knowing how long EAL would continue to increase under such a scenario, we are considering a credit policy enhancement that allows us to request additional collateral, over and above the normal collateral request, in the event of collateral calls over multiple, consecutive business days as a way of mitigating this under- collateralization risk. • At least one ISO has such a provision in their tariff. Slide 3

An under-collateralization risk exists if a market participant’s EAL increases rapidly necessitating collateral calls over several consecutive business days. ACL (i.e., Additional Collateral Business Day Total EAL Adjusted EAL Collateral) Request Comments Day 0 $ 25,000 $ 27,778 $ 50,000 $ - Day 1 $ 100,000 $ 111,111 $ 50,000 $ 61,111 Due within 2 Business Days Day 2 $ 200,000 $ 222,222 $ 50,000 $ 172,222 Increase from Day 1; new amount due within 2 Business Days Day 1 call posted; increase from Day 2; new amount due within 2 Day 3 $ 300,000 $ 333,333 $ 111,111 $ 222,222 Business Days Day 2 call posted; decrease from Day 3; new amount due within 2 Day 4 $ 400,000 $ 444,444 $ 283,333 $ 161,111 Business Days Day 3 call posted; decrease from Day 4; new amount due within 2 Day 5 $ 500,000 $ 555,556 $ 505,556 $ 50,000 Business Days Day 6 $ 600,000 $ 666,667 $ 666,667 $ - Day 4 call posted; day 5 call withdrawn Day 7 $ 700,000 $ 777,778 $ 716,667 $ 61,111 Due within 2 Business Days Day 8 $ 700,000 $ 777,778 $ 716,667 $ 61,111 No change from last call Day 9 $ 700,000 $ 777,778 $ 777,778 $ - Day 10 $ 700,000 $ 777,778 $ 777,778 $ - Slide 4

Graph depicting under-collateralization risk when EAL is increasing rapidly necessitating multiple, consecutive collateral calls. $2,000,000 $1,800,000 $1,600,000 $1,400,000 $1,200,000 EAL $1,000,000 ACL $800,000 $600,000 $400,000 $200,000 Under-collateralized $- Day 0 Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 Day 9 Day 10 Slide 5

In the event of collateral calls over three consecutive business days, one ISO is permitted to request up to 10 times the average of those three collateral calls. Additional Collateral Business Day Total EAL Adjusted EAL ACL Alt #1 Request Alt #1 Comments Day 0 $ 25,000 $ 27,778 $ 50,000 $ - Day 1 $ 100,000 $ 111,111 $ 50,000 $ 61,111 Due within 2 Business Days Day 2 $ 200,000 $ 222,222 $ 50,000 $ 172,222 Increase from Day 1; due within 2 Business Days Day 3 call posted; 3rd consecutive business day of a collateral call; $1,518,519 call based on 10 times the average of the last Day 3 $ 300,000 $ 333,333 $ 111,111 $ 222,222 three days' calls; due within two business days Day 4 call posted; 4th consecutive business day of a collateral call; $1,851,852 call based on 10 times the average of the last Day 4 $ 400,000 $ 444,444 $ 283,333 $ 161,111 three days' calls; due within two business days Day 5 $ 500,000 $ 555,556 $ 1,801,852 $ - Day 5 call posted; day 6 call withdrawn Day 6 $ 600,000 $ 666,667 $ 1,801,852 $ - Day 7 $ 700,000 $ 777,778 $ 1,801,852 $ - Day 8 $ 700,000 $ 777,778 $ 1,801,852 $ - Day 9 $ 700,000 $ 777,778 $ 1,801,852 $ - Day 10 $ 700,000 $ 777,778 $ 1,801,852 $ - Slide 6

Graph depicting one ISO’s approach to mitigating the risk of under-collateralization when collateral calls are made over three consecutive business days. $2,000,000 $1,800,000 Excess collateral to $1,600,000 cover under- collateralized rise in $1,400,000 EAL; MP may request $1,200,000 collateral return when EAL activity levels off $1,000,000 ACL ACL Alt #1 $800,000 $600,000 $400,000 $200,000 Under-collateralized $- Day 0 Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 Day 9 Day 10 Slide 7

The ISO is open to Credit Working Group suggestions in designing alternatives that address this issue. • Do Credit Working Group members view this form of under- collateralization a credit risk worth mitigating? • Have other companies considered this risk in dealing with their own counterparties? • What alternatives to the other ISO’s approach, if any, should be considered? For example; – Modify the number of consecutive days and/or the The ISO is not multiplier in the other ISO’s approach advocating or – Analyze the use of Adjusted EAL in making recommending all collateral calls (e.g., change divisor from 0.9 to 0.8) any of these – Reduce the number of days required to post approaches collateral (precedence for 1-day posting by another ISO) – Others??? Do nothing??? Slide 8

To be consistent with other forms of ISO contracts, the ISO will be implementing changes to the Officer Certification Form after April 30, 2013. • Eliminate notary requirement • Change paragraph 6 of the form as follows: • This change will apply to new market participants after April 30, 2013 and will be required as part of the 2014 officer certification process. Slide 9

There may be an opportunity to enhance the credit- related information the ISO provides to market participants via the Market Participant Portal. Slide 10

Currently the Credit Management section of the Market Participant Portal provides available credit for CRR auctions and other market activity as well as limited reporting capabilities. Slide 11

The Parent Company EAL Report provides Total EAL and Collateral by Business Associate ID (“BAID”). Slide 12

The Parent-Child EAL Report provides a breakdown of EAL by each of the EAL components by BAID. Slide 13

The Detailed Charge Data report provides a further breakdown of EAL at the Charge Code level by Trade Date. Slide 14

Are there additional on-line, credit-related data that would assist market participants in managing their activity with the ISO? • Please send such requests to CreditPolicyComments@caiso.com. • The ISO will assess the feasibility of all requests. Criteria to be used includes but is not limited to: – Technical feasibility – Cost – Value to the majority of market participants • The Credit Working Group may be asked to assist in prioritizing requests. • The ISO will maintain and communicate the upgrade release schedule. Slide 15