- As of 1 September 2020, Izba Rozliczeniowa Giełd Towarowych (IRGiT) introduced new initial margin cross-product netting model for the Electricity Forward Market (EFM).
- Changes in the collateral system applied by IRGiT allow market participants possibility to obtain as much as up to 100% reductions of the initial margin value compared to the current model.
- New cross-product netting model increases the efficiency of entire clearing guarantee system, while ensuring full security of the clearing of transactions executed at the Polish Power Exchange.
„The implementation of new cross-product netting model is the next step in development of the IRGiT’s clearing guarantee system. Its launch has been preceded by numerous analyses and consultations with market participants, inter alia on the Risk Committee level. We offer our Clearing Members an efficient and attractive model which, according to our estimates, will be used by approx. 75% of market participants. It is noteworthy that the solution is also addressed to power groups which have signed internal netting agreements with IRGiT. Introduction of these changes would not be possible without the significant engagement of the IRGiT team and the support of the Risk Committee Members, for which I would like to thank everyone.” said Łukasz Goliszewski, Vice-President of the IRGiT Management Board.
The cross-product netting model is aimed at optimizing the existing collateral model used by IRGiT and changes the method of calculating the initial margin for BASE, PEAK and OFFPEAK contracts. The new model assumes adaptation of the level of requirements regarding the initial margin to the risk generated by the positions of Clearing Members, taking into account opposite positions in concluded contracts for electricity with different delivery profiles.
„The new margin netting model is one of the most important changes in the operation of the clearing guarantee system of the past few years. It should be emphasized that this change has been widely expected by the market. Its implementation may contribute to a significant reduction of the amount of the required collaterals, which will directly translate into a reduction of the costs of operation on Polish Power Exchange markets. In addition, the model is important also for arbitrage on the Polish Power Exchange. Reduction of its costs will improve market efficiency” – said Jakub Gajewski, Head of the Commodity Market Proprietary Investments Department at Noble Securities.
Additionally, the mechanism aims to eliminate the difference between the initial margin assigned to the position in the BASE contract and the margin assigned to the equivalent of such position in PEAK and OFFPEAK contracts. In the previous model, where the margin was calculated separately for each contract profile, there was a surplus, while the new solution allows for its netting up to as much as 100%.
„The Risk Committee is a platform for efficient cooperation of industry associations and organizations with the Clearing House. Cross-product netting, which is applied in IRGiT’s clearing guarantee system, will make it possible to reduce the margin burden for commodity exchange participants, including power groups. In the course of the work we have analyzed the pros and cons of netting and in the next steps an independent party has verified its impact on the security of clearing and brining the collateral paid in by all companies trading on the exchange to a realistic level“ – says Arkadiusz Wronka, Risk Committee Member.
The implementation of cross-product netting mechanism completes the first of the two implementation stages of the comprehensive netting model recommended by the IRGiT Risk Committee. In the next stage IRGiT will introduce cross-period netting, aimed at reflecting in the level of the initial margins, the reduction of the risk as a result of occurrence of opposite positions in the Clearing House Members’ portfolios in different delivery periods, both at the Electricity Forward Market and the Gas Forward Market.
The new version of the “Detailed Clearing and Settlement Rules of the Exchange Clearing House” enters into force as of 1 September 2020. It includes amendments in the provisions pertaining to the method of calculation of initial margins for the electricity forward market taking into account the cross-product netting component, and defines more precisely the rules regulating the order of accepting non-cash collaterals towards collateral margins.