Natural Gas Exchange Inc
PRMIA – May 31, 2006
2
SECTION ONE: NGX BACKGROUND
3
Introduction to NGX• Business Concept:
Electronic trading and clearing services to North American energy market participants
NGX is a service provider and therefore does not trade or take positions
• Headquartered in Calgary, Alberta, Canada
• Incorporated in 1993, began trading operations in Feb 1994
• Ownership HistoryInitial Ownership by Westcoast Energy Inc.Acquired by OM on Jan 1, 2001Acquired by TSX Group March 1, 2004
• Services providedElectronic Marketplace
Pipeline balancing instruments Market advocacy (facilitating transactions) Market agency (facilitating order entry) Real-Time Price Index Generation
Clearing House Assured performance Trade and counterparty netting Centralized collateral management Centralized risk management
4
Current NGX Product Locales
NGX Products & Services
Financial Products Physical Products
Upcoming Products
NGX INTRA-ALBERTAEMPRESS EMERSON/GREAT LAKES
FUTURES SWAPSHENRY SWING SWAPSLDS FOR GDD
PARKWAY
IROQUOIS
NIAGARA FALLSCHIPPAWA
DAWN
NBPL VENTURA CHICAGO SWAPSNICOR-NGPL
MICHCON SWAPS
ALBERTA POWER SWAPS
MALIN SWAPS
ROCKY MTN SWAPS
ATCO NORTHSTATION #2
TEP
PG&E CITYGATE
PG&E CITYGATE SWAPS
SOCAL GAS
SOCAL GAS SWAPS
MALINST. CLAIR
SUMAS SWAPS
ALBERTA SWAPS
HUNTINGDON
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Operational Statistics
• 138 NGX Contracting Parties–“Member” firms eligible to transact through the
Exchange
• List 102 physical and derivative products
• Average in Excess of 400 Traders Online Daily
• Approximately 100 View-Only Users Online Daily
• 2005 Trading Statistics:–Volume = 8.8 Tcf–Transactions = 185,878
• Average Daily Deliveries in Excess of 12.0 Bcf
6
Historical NGX Trading Activityto March 31st, 2006
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
Year
Tota
l Qua
ntity
Tra
ded
(PJ)
-
100
200
300
400
500
600
700
800
900
1,000
1,100
Mon
thly
Ave
rage
Tra
ded
(PJ)
# of Days 324 365 365 365 365 365 366 365 365 365 366 365 90
Electricity (PJ) - - - - - - - - - 18 20 4 0
US Swaps - - - - - - - - 12 58 58 93 3
CDN Swaps - - - - - - - - 260 1,130 1,458 412 30
OTC Clearing (PJ) - - - - - - - - 84 351 236 449 160
U.S. (PJ) - - - - - - - - 1 6 - 1 0
Eastern Canada (PJ) - - - - - - 152 389 581 999 1,132 927 389
Western Canada (PJ) 23 59 427 938 1,379 2,349 2,353 2,756 3,617 3,901 4,513 6,936 2,063
Percentage Growth 0% 161% 621% 119% 47% 70% 7% 26% 44% 41% 15% 20% 33%
Monthly Average Traded (PJ) 2 5 36 78 115 196 209 262 378 534 613 735 881
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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2006 Trading Turnover by Product Type
Eastern Canada Physical (PJ)
14.7%
OTC Clearing (PJ)6.0%
Western Canada Physical (PJ)
78.0%
U.S. Physical (PJ)0.0%
US Swaps (PJ)0.1%
CDN Swaps (PJ)1.1%
Electricity (PJ)0.0%
Western Canada Physical (PJ)
Eastern Canada Physical (PJ)
OTC Clearing (PJ)
CDN Swaps (PJ)
US Swaps (PJ)
Electricity (PJ)
U.S. Physical (PJ)
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SECTION TWO : CLEARING STRUCTURE
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How is Counterparty Risk Mitigated?
• Standard Rules
• Collateral Provisions
• Liquidation Rights
• Backstopping
• Settlement Bank
• Emergency Fund
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Clearing Structure
Physical Backstopping (storage)
Settlement Banking Credit Facility
Defaulting Party Collateral (100% Coverage Under NGX Exposure Model)
NGX Cash Reserves
NGX Emergency Fund ($30MM CIBC Mellon Trust)
Deposit Agreement
Deposit Agreement
$
$ or Natural Gas
PayerPayer PayeePayee
$
$ or Natural Gas
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Clearing Statistics
• Cleared Transactions –180,000+ transactions cleared annually–Notional value of transactions consummated is in excess of
CAD60 Billion annually
• Margin–Over 130 corporate margin accounts held–Margin accounts averaging CAD2.0 Billion, peaking at one
point, in excess of CAD4.0 Billion in cash and LCs
• Settlement–Settlement in both USD and CAD cash streams–Monthly settlement values averaging over CAD1.2 Billion
(peak, CAD2 Billion) processed
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• Collateral on deposit in excess of CAD $1.88 Billion
• Approx. CAD $1.6 Billion LC’s, CAD $0.28 Billion Cash
Collateral MakeupNGX Margin Dispersion May 30, 2006
AR Margin, $560
Variation Margin, $76
Initial Margin, $494
Cushion Collateral $400
Surplus Collateral $263
$-
$500
$1,000
$1,500
$2,000
Collateral Posted
CA
D $
MM
13
NGX - Bank Risk by S&P Rating, May 30, 2006
$129,000,000.00
$803,725,000.00
$860,192,830.00
$87,950,000.00
CAD 0
CAD 250,000,000
CAD 500,000,000
CAD 750,000,000
CAD 1,000,000,000
AA AA minus A plus A
S&P Rating
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SECTION THREE: RISK MANAGEMENT
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Performance Risks
• Failure to Make/Take Delivery
• Failure to Pay
• Failure to Provide Collateral
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Margin Requirements
• Risk Measurement– Performance risks are quantified through NGX’s margining
methodology, which attempts to estimate probable worst-case portfolio value
• Collateral– Accepted in the form of cash and irrevocable letter of credit from
an A or higher rated bank – Collateral is held to support the Contracting Party’s traded
positions and can only be used to remedy a performance failure by the Contracting Party itself
• Margin Triggers– If margin requirements reach 80% of collateral deposited, NGX will
request additional collateral– At 90%, NGX may restrict the Contracting Parties trading
capabilities– At 95%, NGX is entitled to invoke the liquidation procedure
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Risk Measurement
• NGX uses Web Reports to monitor trading activity and counterparty positions.
• Reports can be accessed from the NGX website www.ngx.com, or from the NGX Trading System.
• NGX measures risk in real-time and calculates margin requirements to quantify the risk measurement.
• Margin Requirements consists of–Accounts Receivable/Payable (netted)–Variation Margin (Mark-to-Market, also netted)–Initial Margin
A calculation of the probability of a movement in market prices during a two-day holding period
Initial margin coverage protects against a prolonged liquidation
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Initial Margin Methodology
• NGX utilizes a Value-at-Risk methodology
• NGX’s VaR calculation measures the worst expected price change in a date range for a product over a given time interval under normal market conditions at a given confidence level
• VaR, while imperfect and subject to several limitations, provides a measurement tool that has historically been an accurate measure to evaluate potential exposure in a portfolio
• Calculated based on statistical analysis of historical prices.Calculations:
Delta = ln (settlement price/previous day settlement price)
Daily Volatility = √[{(delta1)² + (delta2)²…(deltan)²}/n]
VAR = standard deviation x √(hold period/# of days) x daily volatility x last price
Standard Deviation = 2.7
Hold Period = 2 or 5 days (Depending on market liquidity)
Number of days = 2 years
• NGX uses a half life decay rate to give higher weighting to the recent periods.
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Reports
• For a number of reasons (scalability, efficiency, ease of use, etc) NGX has made all the information required by the front, middle and back offices available through the Web
• Reports readily accessible include daily trade reports, confirmations, invoices, details of settlements, deliveries, fees, user permissions etc.
• Risk reports are also made available for CounterParties to check their own Margin Requirements at NGX
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Questions and Contact Information
Dan Zastawny – Vice President, Clearing & [email protected]
Kenny Foo – Clearing [email protected]
Natural Gas Exchange Inc.Suite 2330, 140 4th Avenue SWCalgary, AlbertaCanada T2P 3N3
Phone 403.974.1700Fax 403.974.1719
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