Summary of the year 2018 in the risk management area at IRGiT

The past year saw intensive works by the Warsaw Commodity Clearing House, especially in optimizing the clearing guarantee system. The actions taken by IRGiT in 2018 contributed to a significant improvement of the safety level for participants in the markets operated by the Polish Power Exchange. 

We have strengthened IRGiT’s offer in the area of risk management and security in 2018. The implementation of the changes addresses the needs of market participants in optimizing the level of costs associated with exchange trading, or implements recommendations of the Polish Financial Supervision Authority with regard to the market safety level. We have been communicating the changes that we are introducing and planning to market participants, in particular using the Risk Committee, an advisory body to the IRGiT’s Management Board, which is composed of representatives of associations of the House’s members, said Seweryn Szwarocki, Vice President of IRGiT’s Management Board.

The year 2018 was exceptional in terms of the observed price levels and volatility on the markets for electricity, gas and European Emission Allowances (EUAs). For example, the price of the BASE_Y-19 annual contract for energy at the beginning of the year was roughly 180 PLN/MWh and at the end of the year it reached more than 290 PLN/MWh, experiencing in that period the maximum daily volatility exceeding 7%. Similar circumstances on the Scandinavian market caused an insolvency incident, which cost the participants of the local exchange more than EUR 100 million. Those events confirm how important an appropriate structure of risk management models is in exchange trading. IRGiT, by improving the standards of those models, also considered the interests of the market participants in the context of costs incurred by them, said Łukasz Goliszewski, Director of the Risk Management Department at IRGiT.

 

Summary of key changes in IRGiT’s offering in respect to the clearing guarantee system and risk management:

  • Launch of a new margin offset model for energy groups

        ◦ IRGiT has implemented a new collateral margin offset model for energy groups. The new model allows for an additional reduction of up to 80% of the required initial margin at a group level and in further application up to 100% reduction of the supplementary margin level. Subscription to the new model is conditional upon the group signing an agreement on joint and several liability, the new version of which has been developed by IRGiT in order to ensure better mitigation of legal risks.

  • New model for determining contributions to Guarantee Funds

        ◦ In October, a new model was implemented for determining contributions to guarantee funds. The amount of the contribution is now based on the amount of the loss calculated in a stress testing exercise; as a result, the new model considers risks generated by the individual entities, in particular by energy groups, more precisely, which allowed for a reduction of the total value of the fund by approximately 35% on the gas market.

  • Implementation of a new model for calculating haircuts

        ◦In April, a new model was launched for calculating haircuts for collateral contributed in the form of EUA and PMOZE_A. The new model assumes dynamic monthly updates and regular back-testing. The implementation of this model, combined with a significant improvement of risk management standards, allowed for a more optimal utilization of security by the members – the haircuts were set at attractive levels of 37% for EUA (previously 50%) and 38% for PMOZE_A (previously 70%).

  • Use of the House’s own funds to secure liquidity of clearing operations

        ◦After a consent was received from KNF, new provisions were introduced to the Regulations of the Exchange Clearing House, which allowed for the use of PLN 10 million of IRGiT’s equity to ensure liquidity of settlements in specified circumstances.

  • Changes in the collateral margin calculation model

        ◦ Changes in the collateral margin calculation model included, among others, changes in the model for calculating clearing rates and incorporation of collateral of VAT. The goal of these changes was to better reflect the level of risk generated by the individual Members of the House. Additionally, in December a new model was introduced for calculating and updating risk parameters, as a result of which the level of collateral margins will dynamically respond to the current market volatility.

  • Strengthening the role of the Risk Committee

        ◦ IRGiT has increased the powers of the Risk Committee and extended its composition. The Risk Committee allows for an exchange of opinions and consultation of planned changes in the clearing guarantee system while taking into account the perspective of each of the groups involved in exchange trading: producers, offtakers, trading companies, direct members, brokerage houses and their clients.

  • Intensive education activities about the role of the clearing guarantee system

        ◦ The House continued the policy of actively educating its Members in risks associated with the participation in exchange trading and the role played by the clearing guarantee system organized by IRGiT. IRGiT’s representatives took part in the meetings of the Electricity and Gas Committee organized by the Polish Power Exchange, in meetings with the Association of Energy Trading (TOE) as part of the newly-established Clearing Guarantee System Optimization Team and in industry conferences such as Energy Fair (Targi Energii) or Montel Market Insights.