76841_margincallcalculationpower

7/31/2019 76841_margincallcalculationpower

1/35

Last updated 18.11.2011

CALCULATION OF COLLATERAL CALL

AND SETTLEMENT OF

FINANCIAL

POWER CONTRACTS

Related Documents:

1) Clearing Rules for Commodity Derivatives:www.nasdaqomxcommodities.com/membership/legalframework/

2) SPAN parameter file:www.nasdaqomxcommodities.com/clearing/riskmanagement/spanparameterfiles


2/35

2

1. Introduction ........................................................................................................ 31.1 NASDAQ OMX Commodities an Overview ......................................................... 31.2 Information Provided by NASDAQ OMX Commodities ............................................ 31.3 Basic Features ................................................................................................. 31.4 SPAN ............................................................................................................ 3

2. Calculation of the Collateral Call ............................................................................ 4

2.1 Base Collateral ................................................................................................. 42.2 Group Risk ...................................................................................................... 42.3 Variation Margin ............................................................................................... 42.4 Initial Margin ................................................................................................... 5

Risk Intervals 5Time Spread (correlation) 5Delta Netting 5Inter Commodity Spread Credit 6

2.5 Cash Margin .................................................................................................... 62.6 Collateral Rules ................................................................................................ 62.7 SPAN parameters ........................................................................................... 6

Standard Deviation 7Risk Interval Multiplier 7

Correlation Matrix 7Marginal Value Time Spread 7High and Low Implied Volatility 7Routines for Revising the SPAN-parameters 8

3. Calculating Daily Margin Calls using SPAN............................................................. 83.1 Calculating the Variation Margin ......................................................................... 83.2 Calculating the scanning range ........................................................................ 103.3 Calculating the risk array ................................................................................ 103.4 Calculating the Initial Margin ........................................................................... 11

3.4.1 Example of Initial Margin for a Forward and an Option Contract 123.5 Calculating Time spread .................................................................................. 14

Example of a correlation matrix, historical correlation between delivery periods 14

Example of time spread position: 163.6 Calculating Time Spread with Delta Netting ....................................................... 163.7 Calculating Inter Commodity Spread Credit ....................................................... 173.8 Risk Neutral Positions ..................................................................................... 18

Delivery Margin 18Example of RNP for one Delivery Period 19

3.9 Calculating Group Risk .................................................................................... 193.10 Calculating Cash Margin ............................................................................... 19

Definitions of phrases 19Futures with a daily market settlement 19Futures with a Spot Reference Cash Settlement 20Forwards with a Spot Reference Cash Settlement 20Net Cash Margin for Futures and Forwards 20

3.11 Summary of the Margin Call ......................................................................... 204. Appendix 1, Settlement ...................................................................................... 215. Appendix 2, Risk Report ..................................................................................... 246. Appendix 3, RNP................................................................................................ 267. Appendix 4, Cash Margin .................................................................................... 298. Appendix 5, Pricing options using delivery to strike............................................. 34


3/35

3

1.IntroductionAs a clearing house, NASDAQ OMX Commodities (NOMXC) enters into a trade as centralcounterparty vis--vis the initial buyer and seller. In order to handle the counterparty risk,NOMXC calculates a daily margin call for each member (in this document the expression

member also includes clearing clients) covering their risk in open positions and pendingsettlements. The aim of this document is to describe NOMXC margin call calculations for

financial power contracts. The settlement procedure is left for Appendix 1.

The first part of this document provides a basic overview of the margin calculation. Thesecond part explains these principles in more detail, while the third part illustrates themargin call calculation process step-by-step. Appendix 1 explains the settlements in allproducts and Appendix 2 gives an example of the SPAN calculation. Appendix 3 explainsrisk neutral positions in depth, Appendix 4 contains cash margin calculations and Appendix5 contains information regarding options pricing.

1.1 NASDAQ OMX Commodities an Overview

NASDAQ OMX Commodities is the brand name for the commodities division within theNASDAQ OMX Group, Inc, and offers a worldwide suite of commodity related products and

services. The NASDAQ OMX Commodities offerings include power, natural gas and carbonemissions markets and clearing services. NASDAQ OMX Commodities Europe providesaccess to the worlds largest power derivatives exchange and one of Europes leading carbonmarkets through NASDAQ OMX Commodities Europe.

1.2 Information Provided by NASDAQ OMX Commodities

All members receive daily reports on their trades, net positions, margin calls and settlementof their market positions. Monthly lists are distributed for accounting purposes.

1.3 Basic Features

A members portfolio may consist of future, forward, CfD, and option contracts. The variousderivatives are grouped so that the derivatives with the same underlying reference price(system price) are in the same risk group. For each risk group a margin call is calculated.CfDs are divided into separate groups, one per price area. The sum of the margin calls forall the group risks is equal to the daily margin call.

1.4 SPAN

As a clearing house, NOMXCrisk is that a counterparty may not be able to fulfil its futureobligations. To reduce this risk, NOMXC requires all members to post collaterals for theirobligations. NOMXC uses SPAN to calculate the size of collateral requirements.

SPAN, which is an abbreviation for Standard Portfolio Analysis of Risk, is a system forcalculating margin calls developed by the Chicago Mercantile Exchange in the US.Introduced in 1988, SPAN is used by more than 30 exchanges and clearing houses

worldwide1.

The starting point for calculating margin call with the SPAN system is the followingquestion: "How much can NOMXC acting as contractual counterparty reasonablyexpect to lose if a member cannot meet the collateral requirements for its positions and the

1 London SPAN, implemented by the London Clearing House, is among the best-known versions of SPAN. TheSPAN version is developed specifically for financial power contracts based on the SPAN-methodology.


4/35

4

market simultaneously moves in an unfavourable direction?" NOMXC uses both historicaldata on price fluctuations and recognised pricing models to make these calculations. If amember fails to post adequate collaterals, NOMXC has the right to close positions in themarket on the account and risk of the member.

The collateral posted by each member must be adequate to cover portfolio losses that might

arise before the next collateral call on the following trading day, should the market move inan unfavourable direction. NOMXC requires each member to post collateral covering worst-case portfolio losses.

2. Calculation of the Collateral CallThe collateral call consists of the base collateral and the daily margin call.There are threedifferent components in the daily margin call that are summed up to a group risk. Theseare: variation margin, delivery margin and initial margin. A cash margin is calculated as apart of the group risk. The components of the collateral call are described below.

2.1 Base Collateral

NOMXC requires a base collateral to cover overnight risk, i.e. the risk due to the fact thatthe daily margin call is not confirmed until 11:00 CET the next trading day. It is based onthe customers financial strength and its open interest at NOMXC. The base collateral callmust be posted before clearing may commence.

2.2 Group Risk

The group risk shows the aggregated margin call for the financial power contracts includedin the group. The spot reference price (the price against which power contracts are settledin the delivery period) determines to which group a power contract belongs. All productswithin one group are sorted in delivery periods and netted into one net position for eachdelivery period.

The group risk consists of various risk groups out of which the largest one contains powercontracts with reference to the Elspot system price.

Moreover there are separate groups for CfDs (Contracts for Difference) between the areasand system price for the areas Oslo, Stockholm, Helsinki, Copenhagen, rhus,

Troms, Lule, Sundsvall and Malm.,

These groups formulate the Sum Group Risk Derivatives/cash margin, which is the totaldaily margin call for one clearing member.

If theSum Group Riskhas a negative value, the member has a margin call that needs tobe covered by cash or a guarantee.

2.3 Variation MarginThe variation margin is the cost for liquidating the portfolio at the prevailing market price.Liquidating the portfolio is to sell bought options, futures and forwards and buy back thesold options, sold futures and forwards.

Forward contracts are mark-to-market every day in the trading period, but the physicalcash settlement is not done until the contracts delivery period. This means that anunrealised gain or loss for forward contracts in the portfolio is accumulated. The unrealised


5/35

5

settlement can be locked in by closing the position(s) and is treated in SPAN as variationmargin for forward and CfD contracts.

Futures are subject to a daily mark-to-market and cash settlement. The variation marginfor futures will always be zero in the security calculation.

A forward in delivery will continue as one contract during the delivery period.

2.4 Initial Margin

Initial margin (risk scenario) states how much the open positions in the portfolio can changein value at the least favourable price development within a risk interval (price changeinterval).

Risk IntervalsThe risk intervals reflect the maximum expected price movement for the power contractsduring a certain close-out horizon (lead days) and within a certain confidence interval. It isbased on historical volatility along with other variables. The risk interval is calculatedaccording to the formula below:

Risk Interval (% of closing price) = Daily Volatility (%) * 3 * SQRT(d)

where; the Daily Volatility is estimated by the Clearing House, the factor 3 represents 3standard deviations (gives a 99.7% confidence) and dis the number of days in the close-out horizon (lead days).

The risk interval relating to the option depends on several parameters: implied volatility,price on the underlying contract, closing price on the option, and expected change in theimplied volatility and price of the underlying for the next day.

Based on the risk interval, SPAN calculates 16 different risk scenarios for one net position(futures, forward and options). The model chooses a scenario that gives the largestpotential loss for the net position. This is done for all net positions in the portfolio and thesum total of the scenarios (always negative) makes up the initial margin for the portfoliobefore netting due to time spread (correlation) and inter commodity spread credit.

Time Spread (correlation)

The time spread determines to what extent the initial margin can be reduced due to thecorrelation between power contracts with differentdelivery periods and opposite positions.Time spread netting is applied for most of the risk groups. There is only netting within thegroups, not between them.

The correlation between couples of time spread periods are based on historical prices andsorted according to the most favourable time spread, i.e. the delivery periods with the

highest correlation are netted first. For some delivery periods a correlation approaching 1between two delivery periods can be found, which means that the periods correlate almostcompletely and that a change in the closing price in one of the delivery periods is reflectedby almost exactly the same percentage price change in the other delivery period.

Delta NettingThe Clearinghouse allows crediting or netting between two time spread periods with anopposite net MW (energy) exposure. For futures and forwards the delta is always 1, andthese contracts contribute with their entire energy when netting between time spread


6/35

6

periods. For options on the other hand, the delta depends on the price of the underlyinginstrument.

Inter Commodity Spread CreditThe Clearinghouse may also allow for netting of Initial Margin between markets (riskgroups). The method is called Inter Commodity Spread Credit (ICSC) and builds on the

delta ratio and a credit spread which are defined for pairs of time spread periods ( tiers)belonging to different risk groups, allowed to be included in the ICSC.

Contracts which are determined to have a large enough correlation are included in the ICSC.The ICSC is described in depth at:http://www.nasdaqomxcommodities.com/digitalAssets/67/67891_intercommodityspreadcredit.pdf.

2.5 Cash Margin

The cash margin is a proportion of the daily margin call, which must be covered by cash toassure daily market settlement.

2.6 Collateral RulesThe rules for collateral are described in the Clearing Rules. The collateral rules regulate thecalculation of the margin call. The parameters going into the margin call calculation can bechanged within one hours notice to the members.

Collateral may be posted either as cash on a pledged cash account or as on demandguarantees issued by a financial institution approved by NOMXC. NOMXC calculates the sizeof each members collateral call on a daily basis. In the event of special market conditions,NOMXC may calculate and demand extraordinary collateral in accordance with the rulebook.

2.7 SPAN parameters

In SPAN, a number of parameters are used for the calculation of the margin call, primaryinitial margin and crediting, or netting, based on time spread (correlation) and inter-commodity spread credit.

The following parameters are included in the SPAN model:

1. Standard deviation2. Risk interval multiplier3. Correlation matrix4. Marginal value time spread5. High and low (implied) volatility6. Delta/Spread ratio7. Currency conversion rate

8. Upper and lower limit for risk interval (excluding CfDs)9. Upper and lower limit for implied volatility (options)10.Augmentation integers for CfDs11.Extreme scenarios12.Coverage rate extreme scenarios13.Price models options contracts14.Risk free interest rate


7/35

7

Of the parameters listed above, numbers 1-7 are the most important to the margin callcalculation and will be described further below.

Standard DeviationThe standard deviation reflects the daily volatility in the different delivery periods and is

central to the calculation of the initial margin. Power contracts have a limited length of lifeand the closer the contract gets to the start of the delivery period the higher the volatility.Because of this, the standard deviation is based on the number of days remaining to thestart date and stop date of the delivery period, not each individual power contract. Thecalculation method gives a broad collection of data and the result can be used for alldelivery periods. The standard deviation is calculated for 21 different observational pointscorresponding to the number of days to the start or stop of the delivery period; 1, 8, 15,22, 29, 36, 43, 50, 57, 85, 113, 141, 169,., 1095, 1500 and 1800. The number of days tostart and stop is plotted against the volatility matrix and the standard deviation is calculatedbased on weighting. The standard deviation is calculated on the preceding 12 months, i.e.approximately 250 trading days.

Risk Interval Multiplier

The risk interval multiplier is used in the calculation of the risk interval. It is an outcome ofmultiplying 3 (number of standard deviations) with square root of number of days in aclose-out period (lead days). In accordance with statistical theory, a multiplier of 3 gives aconfidence interval of 99,7%. Number of days in a close-out period is separately estimatedfor each market and depends on the productsliquidity among other factors. In SPAN thestandard deviation is multiplied by the risk interval multiplier and the result gives a riskinterval that is used in the risk matrix. The risk interval is thus expected to cover 99,7% ofprice movements in a defined close-out period. The risk interval is further employed in thecalculation of the initial margin.

Correlation MatrixThe correlation between opposite positions in different delivery periods is very important to

the degree of crediting, or reduction, when netting scenario risk of the delivery periods. Thecorrelation matrix has the same observational points as the standard deviation and is alsocalculated based on the preceding 12 months.

Marginal Value Time SpreadThe marginal value is important to the degree of crediting of the initial margin. The valuesare based on the correlation between delivery periods given by the correlation matrix anddefine the correlation interval that leads to crediting. A correlation over 0,95 p.t. givesalmost full crediting but the degree of crediting drops (number of allowed steps increases)with a decreasing correlation.

High and Low Implied VolatilityVolatility is included in the risk calculation for Options contracts and establishes how much

NOMXC expects the implied volatility to change at the most from one day to another.Delta/Spread Ratio

The delta ratio used in inter commodity spread credit shows the relation between riskintervals for the contracts in different risk groups. A credit spread is a credit factor in %which is based on correlation. These two parameters determine how much the initial margincan be reduced due to the inter commodity spread credit.


8/35

8

Currency Conversion Rate

The currency conversion rate is used in margin calculations for contracts in a currencydifferent from the margin currency. There are different rates used for the conversion ofinitial and variation margin with a positive and negative sign from quotation currency tomargin calculation currency.

Routines for Revising the SPAN-parametersThe SPAN parameters are continuously evaluated and revised by NOMXC when needed2.

NOMXC conducts an evaluation of parameters against existing observations and decides ifan update is needed. Essential differences in the observations or incidents in the market willresult in a change. NOMXC does not operate within absolute limits for essentials in thiscontext, but conducts a total evaluation from time to time.

According to the Clearing Rules, all parameters can be changed within one hours notice, if achange is called for.

3.Calculating Daily Margin Calls using SPAN

Computing collateral requirements using SPAN is a multi-step process:

1. Calculating variation margin for each derivative (loss/gain for NOMXC uponrealisation of the portfolio).

2. Calculating price-scanning range for the underlying instruments (maximumanticipated price movement of future and forward contracts until the next tradingday).

3. Calculating risk array for each derivative series (theoretical values of derivatives indifferent market scenarios based on the scanning range). The risk calculation foroptions is performed based on the underlying instrument's scanning range.

4. Calculating initial margin for each derivative (anticipated largest reasonable loss on

the portfolio given a worst-case scenario).5. Calculating time spread (crediting of initial margin due to correlation between pricechanges in different delivery periods with opposite positions.).

6. Calculating inter commodity spread credit (crediting of initial margin due tocorrelation between price changes on the contracts in different risk groups)

7. Calculating group risk (totalling variation margin, initial margin, and a deliverymargin for each risk group).

8. Calculating cash margin requirement.9. Calculating the total collateral call as the sum of net initial margin, variation margin,

delivery margin and base collateral.

3.1 Calculating the Variation Margin

As described in the introduction, in liquidating positions and conducting close-out oftransactions, purchased options are credited according to daily closing prices. Sold optionsare debited in the same way. Futures in the trading period are settled mark-to-marketevery day and hence the variation margin for futures in the trading period is always zero,whereas for forward and CfD contracts it is the amount calculated as the Expiry MarketSettlement in the daily Transaction and Settlement list.

2All parameters used in calculating security requirements, such as the price scanning range, the volatility range,and the choice of theoretical pricing models for options, are determined by NASDAQ OMX Commodities.


9/35

9

The variation margin for a future, forward or CfD contract in the delivery period is based onthe adjusted (synthetic) market value for the contract. This means that the variation marginis adjusted every clearing day to reflect the non-paid part of the Spot Reference CashSettlement and the Expiry Market Settlement.

For the future contract in the delivery period, the final closing price for the week contract iscurrently used as the adjusted (synthetic) closing price during the entire delivery period forthe week contract. Hence, the variation margin for the future week contract in the deliveryperiod is equal to zero.

The adjusted (synthetic) market value for the forward contract in delivery is calculated asan hourly weighted average of the underlying prices using this formula:

where:

S=daily closing price for future contracts included in the calculation basisO=number of hours in the future contracts included in the calculation basis

F=number of delivery hours remaining in the forward or futures contracts for the deliveryperiod in questionm=first overlapping future contract

n=last overlapping future contract

In this formula, the closing prices for the longest available contracts are used. This meansthat closing prices for the week contract in delivery are used rather than the daily closingprices for the day contract. The hours for the actual position day are not included in thecalculation. As an example, the calculation for ENOMOCT-11 at position date 13th October2011 includes the final closing price of ENOW41-11 (72 hours left), the closing prices of

ENOW42-11 (168 hours), the closing price for ENOW43-11 (169 hours) and ENOW44-11 (24hours).

For the CfDs Month contracts, the adjusted (synthetic) closing price for the CfD Month-contract is a subject to the following components:

where:

D=the difference between the relevant spot reference prices

h=number of quoting days for the spot reference price included in the calculation basisc=closing price for the relevant CfD with delivery the next month 3

If the contract currency is different from the margin currency, variation margin has to beconverted into a margin currency. In this case thehigh (low) exchange rate is used whenconverting a negative (positive) number. The variation margin is converted per position inthe contract series.

3 The Clearinghouse may apply another formula that what is set out above to calculate the adjusted market valueif the Clearinghouse believes that the prices do not reflect the adjusted market value of the product series


10/35

10

3.2 Calculating the scanning range

The price scanning range reflects the maximum anticipated price movement for Futures,Forward and CfD contracts during a certain close-out period. Historical price data forderivatives with the same trading time horizons are the starting point for determining theprice scanning range interval. The scanning range is a risk interval expressed in currency.

3.3 Calculating the risk array

SPAN generates a risk array based on the price scanning range calculations. The factorsused in these calculations of theoretical values are seven different prices for the derivativewithin the scanning range, implemented under two volatility levels, and two extreme pricesfor the derivative or underlying derivative that exceed the scanning range (extremescenarios). Scenario price intervals (up and down) determine the overall price scanningrange.

For each of the seven prices in the scanning range, a theoretical value is calculated at ahigher expected volatility, and a value is calculated for a lower expected volatility. In theseexamples, high volatility would be implied volatility x Volatility multiplier up, and lowvolatility would be implied volatility x Volatility multiplier down. The volatilities are

calculated in the same way for call and put options.

Implied option volatility is used to calculate the theoretical values for the two extreme-pricescenarios; Black-76 is used for this purpose. For option contracts with delivery of theunderlying to the strike, the value from standard Black-76 model will be adjusted with aninterest rate factor. This discount factor takes into account that the value of the option atexpiry will be paid out over the delivery period of the underlying contract (please seeEnclosure 5).

The following 16 different scenarios constitute the standard SPAN risk array for Options.

Scenario Price of underlying

instrument

Volatility

1 Unchanged Up2 Unchanged Down

3 Up 1/3 of price scan range Up4 Up 1/3 of price scan range Down

5 Down 1/3 of price scan range Up6 Down 1/3 of price scan range Down

7 Up 2/3 of price scan range Up

8 Up 2/3 of price scan range Down

9 Down 2/3 of price scan range Up

10 Down 2/3 of price scan range Down11 Up 3/3 of price scan range Up

12 Up 3/3 of price scan range Down

13 Down 3/3 of price scan range Up

14 Down 3/3 of price scan range Down

15 Up, extreme price move Unchanged

16 Down, extreme price move Unchanged


11/35

11

SPAN always compares high volatility for one product with high volatility for the otherproduct (delivery period)

This means that if we look at volatility up we get the following scenarios:

Scenario 16 13 9 5 1 3 7 11 15

Price ofunderlyinginstrument

Down,extremeprice move

Down 3/3 ofpricescan range



Unchanged Up 1/3 ofpricescan range

Up 2/3

pricescan

Up 3/3 ofpricescan range

Up,extremepricemove

For volatility down we have:

Scenario 16 14 10 6 2 4 8 12 15





Down 1/3

pricescan range

Unchange


Up 2/3

pricescan


Up,extremepricemove

3.4 Calculating the Initial Margin

The initial margin should state how much the open positions in the portfolio can change invalue at the least favourable price development within a risk interval.

The first step is to calculate the value of the open positions for the next trading day. Thecalculation uses the theoretical prices from the risk array as its starting point, and showsthe value of the portfolio under the 16 market scenarios.

The risk array is calculated using historical volatility and implied volatility. In order to handleprice movements within a certain confidence interval, a risk interval multiplier4 is used (inthis example 6,7).

Days Annual volatility Daily volatility Risk interval

1 57,03 % 2,99 % 20,00 %

8 57,03 % 2,99 % 20,00 %

15 57,03 % 2,99 % 20,00 %

22 54,18 % 2,84 % 19,00 %

29 54,18 % 2,84 % 19,00 %

36 54,18 % 2,84 % 19,00 %

43 48,47 % 2,54 % 17,00 %

50 48,47 % 2,54 % 17,00 %

57 45,62 % 2,39 % 16,00 %

85 42,78 % 2,24 % 15,00 %

113 42,78 % 2,24 % 15,00 %

141 37,06 % 1,94 % 13,00 %

169 37,06 % 1,94 % 13,00 %

197 31,37 % 1,64 % 11,00 %

4 To get the actual figure, please contact [email protected]


12/35

12

225 31,37 % 1,64 % 11,00 %

337 25,66 % 1,34 % 9,00 %

393 25,66 % 1,34 % 9,00 %

540 25,66 % 1,34 % 9,00 %

603 22,81 % 1,19 % 8,00 %

729 22,81 % 1,19 % 8,00 %

1095 19,96 % 1,05 % 7,00 %

1500 18,53 % 0,97 % 6,50 %

1800 13,00 % 0,97 % 6,50 %

As illustrated above a contract with 15 days to delivery will have a risk interval of 20,00 %

The 16 risk scenarios constituting a risk array are calculated as follows:

Each risk array value is the difference between the next-day value for the risk arrayscenario and today's value of the derivatives.

By calculating these values for all the scenarios found in the array, the scenariogenerating the greatest potential loss becomes apparent. This scenario's lossconstitutes the initial margin, which is one of the individual Group Risk componentsfor calculating a members portfolio risk.

The risk interval for a delivery period where the number of days to the middle of thedelivery period is between two observations is calculated as follows:

For a delivery period with 19 days to start of delivery and delivery ending at day 25, SPAN has the following approach: 3/7 of the period derives from the 15 days to deliveryobservations and 4/7 from 22 days to delivery.

This results in a risk interval of 3/7*20,00%+4/7*19,00% = 19,43%

If a member has a contract in a currency different from the margin currency, a risk intervalin a contract currency is converted into a price change interval given in margin currency bymultiplying the risk interval with the exchange rate, adjusted with an exchange rate riskparameter. This is a currency risk parameter that is added or subtracted from theexchange rate when converting risk from one currency to another (for example, EUR toGBP). If the parameter is set to 2,5% NOMXC will add 2,5% to the exchange rate if the riskhas a negative sign and subtract 2,5% from the exchange rate if the risk has a positivesign.

The numbers in the risk interval are rounded off to two decimals before the initial margin iscalculated. For examples on margin currency conversion seehttp://www.nasdaqomxcommodities.com/clearing/riskmanagement/margining/.

3.4.1 Example of Initial Margin for a Forward and an Option Contract

Implied volatility is not a parameter in the pricing of forward contracts, which results in 9scenarios whereas for options there are 16. Theoretical values of option contracts arecalculated for low and high implied volatilities. Multipliers for high and low volatilities as wellas closing values of forward and option contracts are available in SPAN.


13/35

13

Scenario Theoreticalclosing price

Impliedvolatility

Theoretical changeENOYR-11

1 42,65 - 0

2 -

3 44,17 - 1,52

4 -

5 41,13 - -1,52

6 -

7 45,68 - 3,03

8 -

9 39,62 - -3,03

10 -

11 47,2 - 4,55

12 -

13 38,1 - -4,55

14 -

15 56,3 - 13,65

16 29 - -13,65

Scenario Theoretical closingprice

Implied Theoreticalvalue

ENOC40YR-11

Theoreticalvalue changeENOC40YR-11For underlying prod. volatility

1 42,65 35,86 % 6,54 0,46

2 30,64 % 5,80 -0,28

3 44,17 35,86 % 7,50 1,42

4 30,64 % 6,77 0,69

5 41,13 35,86 % 5,63 -0,45

6 30,64 % 4,89 -1,19

7 45,68 35,86 % 8,52 2,44

8 30,64 % 7,81 1,73

9 39,62 35,86 % 4,79 -1,29

10 30,64 % 4,06 -2,02

11 47,2 35,86 % 9,59 3,51

12 30,64 % 8,91 2,83

13 38,1 35,86 % 4,02 -2,06

14 30,64 % 3,31 -2,77

15 51,75 32,60 % 16,53 10,45

16 29 32,60 % 0,68 -5,4*

*worst case scenario for this Option


14/35

14

3.5 Calculating Time spread

Thus far in calculating the margin call, no account has been taken with regards to thecorrelation in price development between different delivery periods. Such price correlationcould reduce a portfolio's margin call. As mentioned before, time spread calculations areonly applied for some of the risk groups.

Historical price developments show varying degrees of correlation among different deliveryperiods. For example we should, theoretically, be able to identify a (perfect) correlation of1.00 between two delivery periods. This would mean that the contracts correlatecompletely; a change in the closing price for one of the contracts will be reflected in exactlythe same percentage price movement in the other contract.

For portfolios with opposite exposures in different delivery periods, SPAN will takecorrelation into account. Correlation between pairs of delivery periods will be calculatedbased on historical price development and sorted according to most favourable time spreadi.e., those delivery periods with the greatest degree of correlation producing the greatestoffset. NOMXC determines the parameters as to correlations that are to be recognised, howthe greatest offset is achieved, and the magnitude of correlation-based offsetting that can

be achieved between different underlying delivery periods.

For a pair of correlating delivery periods the volume credited is maximized to the energyvolume for the period with the smallest volume in MWh. For the remaining delivery hoursnot affected by the time spread, the initial margin will not change compared to the primaryinitial margin calculation.

Example of a correlation matrix, historical correlation between delivery periods

0 1 8 15 22 29 36 43 50 57 85 113 141 169 197 2251 1 0,388 0,455 0,401 0,381 0,228 0,376 0,374 0,490 0,386 0,380 0,370 0,371 0,389 0,3668 1 0,976 0,966 0,969 0,944 0,934 0,938 0,940 0,900 0,900 0,793 0,772 0,788 0,688

15 1 0,980 0,988 0,980 0,965 0,942 0,940 0,900 0,900 0,844 0,838 0,789 0,68022 1 0,980 0,980 0,969 0,943 0,940 0,920 0,915 0,843 0,843 0,780 0,676

29 1 0,981 0,981 0,980 0,941 0,921 0,921 0,843 0,843 0,822 0,67036 1 0,988 0,988 0,971 0,940 0,922 0,843 0,843 0,826 0,68143 1 0,992 0,978 0,940 0,922 0,844 0,844 0,835 0,68250 1 0,993 0,943 0,931 0,887 0,860 0,841 0,68857 1 0,976 0,940 0,896 0,861 0,840 0,68885 1 0,945 0,940 0,841 0,843 0,722

113 1 0,943 0,942 0,855 0,733141 1 0,944 0,857 0,812169 1 0,896 0,886197 1 0,899225 1337393

NOMXC will calculate historical correlation between different delivery time horizons anddetermine parameters for crediting. Based on the 16 scenarios found in the risk array, thetask is to identify the worst-case scenario for the delivery period in question.

Given full crediting of correlation, it is appropriate to select the same scenario for bothdelivery periods. If, historically, a lower correlation between the two delivery periods inquestion has been calculated for example 0.85 this lower correlation would entail alower degree of crediting. The process of establishing parameters for crediting determineswhich risk scenario is to be evaluated. In all, six such parameters (called marginal values)


15/35

15

are determined. A correlation of 0.5 equates to a parameter of 0.3, (or 3 steps). This meansthat based on the worst-case scenario for one delivery period the process will search withinthe three closest scenarios for the other delivery period and find the worst-case scenario. Itis important to note that search is only done within the same volatility scenario.

The marginal values for the correlation are in this example:

0,95=0 step, 0,85=1 step, 0,7=2 steps, 0,5=3 steps, 0,4=4 steps, 0,3=5 steps

Crediting two periods with a correlation of 0,83 where the worst case for the first deliveryperiod is scenario 5, the process search to combine this with scenario: 13, 9, 5, 1 and 3.

Vol.up starting with scenario 5 as a worst case for the first delivery periodScenario 16 13 9 5 1 3 7 11 15





Down 1/3

pricescan range

Unchange


Up 2/3

pricescan


Up,extremepricemove

Scenario 16 13 9 5 1 3 7 11 15





Down 1/3

pricescan range

Unchange


Up 2/3

pricescan


Up,extremepricemove

Vol.down starting with scenario 6 as worst case for the first delivery period.Scenario 16 14 10 6 2 4 8 12 15





Down 1/3

pricescan range

Unchange


Up 2/3

pricescan


Up,extremepricemove

Scenario 16 14 10 6 2 4 8 12 15





Down 1/3

pricescan range

Unchange


Up 2/3

pricescan


Up,extremepricemove


16/35

16

Example of time spread position:

3.6 Calculating Time Spread with Delta Netting

The margin methodology allows netting between time spread (delivery) periods if the netMW (energy) exposure are opposite between the two periods.

For futures and forwards, the delta is always 1, and these contracts contribute with theirentire energy when netting between time spread periods. For options on the other hand, thedelta depends on the price for the underlying instrument.Delta Netting means that the delta for options are calculated based on a probability-weighted average of a set of deltas calculated for the options (a) after the look-ahead time

has passed (normally one day) and (b) according to possible price changes for theunderlying instrument. The delta found is called the composite delta.

Delta netting gives a good estimate on each members net exposure in the different timespread periods. Delta Netting means that the options contribute with a more correct energyamount instead of using either 1 or 1 as the options delta. Delta Netting results in a morecorrect netting of energy between time spread periods.

The margin methodology defines nine price scenarios and these represent possible forwardprices for the look-ahead time. Nine delta values are calculated for the option contract,using the different price scenarios for the underlying forward.

A weighted average of these deltas is then taken; using the predetermined weights for thedifferent scenarios. This weighted delta decides how much energy the option contributes

within the netting.

In effect, a composite delta value represents an estimate of what the contracts delta will beafter the look-ahead time has passed. The composite delta for each option will be presentedin the risk parameter file.

The predetermined delta weights are calculated based on the probability for each and one ofthe underlying price scenarios. The delta weights are fixed for all options and summarize to1.

Scanning

range

Closing

price

Hours

(1 MW)

-50 MW ENOMJUN-09 7.15 35.11 720

+61 MW ENOQ3-09 6.98 36.6 2208

Time spread

MW MWh -Extreme -3/3 -2/3 -1/3 0 +1/3 +2/3 +3/3 +Extreme

-50 -36,000 231,660 257,400 171,600 85,800 0 -85,800 -171,600 -257,400 -231,660

16 36,000 -226,152 -251,280 -167,520 -83,760 0 83,760 167,520 251,280 226,152

5,508 6,120 4,080 2,040 0 - 2,040 -4,080 -6,120 -5,508

-89,880

45 98,688 -619,958 -688,842 -459,228 -229,614 0 229,614 459,228 688,842 619,958

-778,722

-1,197,522

Effect of time spread -418,800

01/04/2009Date

01.06.2009-30.06.2009

01.07.2009-30.09.2009

Corr. = 0,94 ("1 step")

Initial margin Rest

Initial margin "Worst case" (+3/3 & +2/3)

01.07.2009-30.9.2004

Sum Initial Margin

Initial margin without time spread


17/35

17

Examples of delta weights can be presented as follows:

Delta point Price scenario

underlying forward

Change in

Volatility

Weight

1 - 3/3 0 0,01

2 - 2/3 0 0,06

3 - 1/3 0 0,24

4 0 (no change) 0 0,38

5 + 1/3 0 0,24

6 + 2/3 0 0,06

7 + 3/3 0 0,01

8 + extreme move 0 0,00

9 - extreme move 0 0,00

A simplified example of calculating net energy in a time spread period

Assume the following position and composite deltas:ENOC27YR-11+100 MWComposite delta equals +0,9

ENOP27YR-11+99 MWComposite delta equals -0,7

The net energy for the time spread period equals:+0,9*100*8760 + (-0.7)*99*8760 = +181 322 MWh

In the current method, the net energy delta for the time spread period equals:+1*100*8760 + (-1)*99*8760 = +8 760 MWh

The delta netting will affect the amount of energy netted between time spread (delivery)periods.

3.7 Calculating Inter Commodity Spread Credit

NOMXC allows for inter-commodity netting to optimize the daily margin call for clearingmembers. By giving a credit to offset positions in products with sustained price correlationwhen calculating margin, significant collateral benefits are offered to clearing members.

Inter commodity spread netting is applied between products in the same asset class (e.g.Nordic Base forwards and German base forwards) and products from separate asset classes(e.g. Nordic Base forward and allowances).

Inter commodity spread credit is introduced after all possible netting effects within each riskgroup are extracted. It is implemented on contract level. The list of contracts which canparticipate in inter commodity spread calculation is available on


18/35

18

http://www.nasdaqomxcommodities.com/digitalAssets/67/67896_icsc.pdf.The contracts aresplit down to smaller tradable products and credit will be given to the smallest tradablecontracts. The smallest component are weekly contracts (day contracts are not the part ofthe inter commodity spread credit). Monthly contracts will be broken down to weeklycontracts, but the credit effect will take place for the synthetic month contracts.

In calculating inter commodity spread credit NOMXC will go through the portfolio after acomplete netting of each risk group and list remaining delta for each contract. If a productcan take part in inter-commodity spread credit, the product will get a tier connected to itsname. The system will make a list of all possible credits based on the priority between thedifferent tiers (the higher the credit, the higher the priority). For the details seehttp://www.nasdaqomxcommodities.com/digitalAssets/67/67891_intercommodityspreadcredit.pdf.

3.8 Risk Neutral Positions

Besides time spread and inter commodity spread credit, Risk Neutral Positions (RNPs) couldalso reduce a portfolios margin call. As the name says this is a position where forwardcontracts with opposite signs can neutralize each others risk given certain conditions .

Only forwards are allowed to participate in a RNP. A RNP consists of two sides. All contractson both sides must belong to the same risk group. Side 1 should always be one contract,which has the longest delivery period, while side 2 should have contracts with combineddelivery periods that exactly match the delivery period on side 1. All contracts defined onthe same side must have the same sign and the opposite sign compared to the other side.This gives us the following allowed combinations:

1. Forward year contract against forward quarter contracts covering the same year(delivery period)

2. Forward quarter contracts against forward month contracts in the same quarter andyear (delivery period)

When creating a side 1 for the RNP, contracts with the longest delivery period will always beprioritised before contracts with a shorter delivery period.

The number of MW allowed in a RNP is equal to the lowest absolute position on side 1 orside 2.

NOMXC will calculate a new RNP every day to reflect last trading days new trades.

Delivery Margin

A delivery margin will be calculated if NOMXC is exposed to a potential cost of financing thevariation margin cash-flow of the risk neutral position, but RNP positions will per definitiongive a zero initial margin.


19/35

19

Example of RNP for one Delivery Period

Example of variation margin for the delivery period 01.04.2009 30.06.2009:

(-2/-2) * (2184/8760)* 237396 + (2/5) * (-164127.6) + (-2) * 2184 * (36.75-36.8)=-6246.2

The same type of calculation will apply for the rest of the delivery periods creating the RNP.

The variation margin for the RNP will be unchanged as long as the RNP is unchanged. If aportfolio only consists of a RNP, the group risk for the portfolio will be unchanged as long asthe RNP exists unchanged. For a more detailed example, please see Appendix 3.

3.9 Calculating Group Risk

Having taken into account time spread and inter commodity spread credit, the final GroupRisk will appear as the sum of initial margin credited (netted) due to time spread and intercommodity spread credit and initial margin for the remaining delivery periods/hours notaffected by time spread and inter commodity spread credit.

3.10 Calculating Cash MarginThe cash margin is a proportion of daily margin call, which must be covered by cash toassure daily market settlement. Please see Appendix 4 for more details.

Definitions of phrases

Final Closing Price (FCP):A volume-weighted average of the exchange-trading price in aproduct series, used for settlement purposes.

Spot Reference Cash Settlement (SRCS): Settlement between Forward buyer andForward seller, or Futures buyer and Futures seller, for the differences between final closing

price and the spot reference prices in the delivery period.

Spot Reference Price (SRP):A daily reference (spot) price set by Nord Pool Spot AS.

Futures with a daily market settlementThe cash margin for futures with a daily market settlement is fixed at 33% of the calculatedinitial margin. As an example, if the isolated initial margin for the futures is EUR 150 000,the clearing member must deposit EUR 49 500 in cash at a cash account to cover themargin.

Position day t

Product Hours Position Closing price Variation Margin

ENOYR-09 8760 -2 36,8 237396,0ENOQ1-09 2159 8 43,8 -202082,4

ENOQ2-09 2184 5 32,8 -164127,6ENOQ3-09 2208 3 38,8 -49348,8ENOQ4-09 2209 4 31,6 -177868,7

Net -356031,5

Synthetic closing price YR-09 36,75

side 1

side 2


20/35

20

Futures with a Spot Reference Cash Settlement

The cash margin should, in the best possible way, reflect SRCS for the future. SRCS iscalculated as the difference between SRP and FCP for the future. SRCS for trading day (T) isdebited/credited the bank account in the morning the next trading day (T+1), before thefinal collateral time at 11:00 a.m.

In general, SRCS can be calculated the day before trading day (T) (see above) because SRPis known in the market at noon (Nord Pool Spot sets the system price at about 13:00 CET)the day before. The cash margins for futures in delivery can therefore accurately reflectSRCS for the contract.

Forwards with a Spot Reference Cash Settlement

Cash margin is only applicable for forwards in delivery. The cash margin for forwards with aSRCS is calculated in the same way as for futures with a SRCS. The only difference is thatthe cash margin is adjusted for the realized instalment in connection with the Expiry MarketSettlement for the forward.

Net Cash Margin for Futures and Forwards

When the cash margin for futures and forwards is calculated, the cash margins are netted toreflect a net cash margin for all the derivatives. This implies that a positive cash marginfor futures reduces anegative cash margin for forwards, or the other way around. If thesum of the net cash margins is positive, there will not be any cash margin for thecontracts in question.

3.11 Summary of the Margin Call

The total group risk for a member is the sum of the group risk for each of the groups.Please see the following example where the member, in addition to cash on a pledged cashaccount, has posted a guarantee in MEUR as collateral. The guarantee is used first, whencovering the margin call. The cash margin is calculated as a part of the Sum Group Riskand is in this example covered by the cash required due to the group risk. Please note thatthis is just an example. The numbers can therefore be not accurate.

Date: 19.03.2010 Required Guarantee coverage Cash required

Base collateral -2 000 000 2 000 000

Group Risk System Derivatives 10 000 000

Group Risk Stockholm Derivatives -2 000 000

Group Risk Oslo Derivatives 1 000 000

Group Risk CfD Aarhus Forwards -1 000 000

Group Risk CfD Copenhagen Forwards -3 000 000

Group Risk CfD Helsinki Forwards -1 000 000Group Risk CfD Oslo Forwards -1 500 000

Group Risk CfD Stockholm Forwards -3 500 000

Sum Group Risk Derivatives -1 000 000 -1 000 000

Total settlement amount -1 000 000 -1 000 000

Total required account balance -2 000 000

Cash margin -100 000


21/35

21

4.Appendix 1, Settlement

Settlement for financial derivatives

Example:On 10th of March 2010, a member entered into the following contracts:

Bought Futures contract 15 MW ENOW11-10; EUR 61.75 Sold Forward contract 20 MW ENOQ2-10; EUR 46.75 Sold European-style call Option 10 MW ENOCQ30JUN0-30; EUR 14.62

On 11th of March 2010, the member received EUR 327 220 in cash settlement from NOMXCfor this portfolio.

Futures Expiry Market Settlement (trading period)

The Futures contract daily settlement reflects the change in market value from one day tothe next. The value is settled daily through each members cash account.

Example: continued Daily closing price on 10

Mar 2010 ENOW11-10 EUR 61.75 Daily closing price on 11Mar 2010 ENOW11-10 EUR 63.5

[(Daily closing price t) minus (Daily closing price t-1)] x contract size5 x hours in thedelivery period = Futures contract settlement

Futures expiry market settlement on 11 Mar. 2010 = (63.5 61.75) x 15 MW x 168 h =EUR 4410

On the day of the trade, the Futures Expiry Market Settlement is calculated as the dailyclosing price less the contract price, whereas on other days, the difference between dailyclosing prices on the last two trading days is used.

Spot Reference Cash Settlement (delivery period)Forward and Futures contracts kept until expiry day are settled financially each day in thedelivery period. The Spot Reference Cash Settlement for a specific contract is calculated asthe difference between its final closing price and spot reference price.

Example, continued Final closing price ENOW11-10: EUR 63.4 Spot reference price Mar.21 2010: EUR 49.67

[(Spot reference price) minus (Final closing price)] x contract size6 x hours in the deliveryperiod = Spot Reference Cash Settlement

Spot Reference Cash Settlement Mar.21 2010 = (63.4 - 49.67) x 15 MW x 24 h = EUR4942.8

5 with sign6 with sign


22/35

22

Calculating Forward Expiry Market Settlement (trading period)For Forwards, daily price changes for the contract are calculated in the same way as forFutures contracts. However, no cash settlement is conducted during the trading period. Thevalue change is accumulated throughout the trading period and fixed at the contractsexpiry date to be paid in instalments in the delivery period.

Example, continued Daily closing price on 10Mar 2010 ENOQ2-10 EUR 46.75 Daily closing price on 11Mar 2010 ENOQ2-10 EUR 48.08[(Daily closing price t) minus (Daily closing price t-1)] x contract size7 x hours in thedelivery period = Forward contracts Expiry Market Settlement

Forward Expiry Market Settlement on 11 Mar. 2010 = (48.08 - 46.75) x -20MW x 2184 h =EUR -58 094.4

No cash settlement is conducted as long as the contract is in its trading period, though themembers negative Forward Expiry Market Settlement (unrealised loss) is included in thecollateral requirement (Group Risk; variation margin). Positive Forward Expiry MarketSettlement (unrealised profit) reduces Group Risk.

On the day of the trade, Forward Expiry Market Settlement is calculated in the same way as

for Futures.

Realisation of Forward expiry market settlement (delivery period)

The accumulated Forward Expiry Market Settlement, settlement that has been calculated inthe trading period will be realised through financial settlement fixed at expiry date to bepaid in instalments in the delivery period.

Example, continued: On 31st Mar. 2010 Accumulated Forward Expiry Market Settlement ENOQ2-10 EUR

205296

The daily amount to be realised = accumulated Forward Expiry Market Settlement dividedby number of delivery hours in the period multipliedby the number of hours in a day.

Realised Forward expiry market settlement on 1 Apr. 2010 = (205296/2184 h) x 24 h =EUR 2256

Exercising OptionsEuropean-style Options are Options that can only be exercised on their expiration date.NOMXC automatically exercises European-style Options on their expiration date, providedcertain criteria have been met. The exercise date for European-style Options will be thethird Thursday of the month before the first delivery period of the underlying contract.Members can deny automatic exercise and may manually exercise European-style Options

that are not automatically exercised.

Settlement of an exercised Option entails delivery of the underlying contract series at itsstrike price on the delivery date. Exercised Options are netted to one delivery transactionfor the underlying contract series.

7 with sign


23/35

23

Options premiumOn the first trading day following the transaction of the Options contracts, the buyer isdebited and the seller is credited for the premium settlement.

Example, continued: Sold European-style call Option 10 MW ENOCQ30JUN0-30

Option premium: EUR 14.62 per MWh

Premium settlement 11 Mar. 2010 = 14,62 x 10 MW x 2208 h = EUR 322 810

Total cash settlement (trading period)

On 11th of March 2010, the member receives cash settlement which consists of the followingcomponents: futures expiry market settlement and options premium settlement.

Example, continued:

On 11th Mar. 2010 total cash settlement for the portfolio= 322 810+4410= EUR 327 220


24/35

24

5.Appendix 2, Risk ReportPlease note that this is just an example of the structure of the risk report. The numbers aretherefore not accurate!

Forwards

Series RiskGroup Position ContractSize Volume ClosingPrice RiskInterval

/ CompDelta

(options)

VariationMargin InitalMargin

Pre Netting

NettedInitial

Margin

DailyMargin Call

ENOMMAR-10

ENOBase

941,00 239 224 899 51,61 12,90 -9 911 684 -2 901 197 -2 901 197 -12 812 881

ENOMAPR-10

ENOBase

200,00 720 144 000 47,00 10,65 7 344 202 -1 533 600 -1 533 600 5 810 602

ENOQ2-10 ENOBase

-235,00 2 184 -513 240 44,68 9,25 -6 129 767 -4 747 470 1 180 155 -4 949 612

ENOQ1-11 ENOBase

970,00 2 159 2 094 230 48,00 4,84 -7 438 338 -10 136 073 -7 519 628 -14 957 966

ENOQ2-11 ENOBase

-199,00 2 184 -434 616 38,85 3,50 354 420 -1 521 156 1 012 655 1 367 075

ENOQ1-12 ENOBase

-327,00 2 183 -713 841 43,45 3,48 550 662 -2 484 167 1 656 111 2 206 773

ENOQ4-12 ENOBase

-1,00 2 209 -2 209 42,95 3,44 1 215 -7 599 5 059 6 274

ENOYR-11 ENOBase

79,00 8 760 692 040 41,00 3,74 453 593 -2 588 230 -1 340 559 -886 966

ENOYR-12 ENOBase

0,00 8 784 0 39,80 3,18 -77 299 0 0 -77 299

Options

Series Risk

Group

Position Contract

Size

Volume Closing

Price

Comp

Delta

Variation

Margin

Inital Margin

Pre Netting

Netted

Initial

Margin

Daily Margin

Call

ENOPQ30JUN0-38

ENOBase

-100,00 2 208 220 800 2,60 -0,36 -574 080 -802 829 225 216 -348 864

ENOC33YR-11

ENOBase

25,00 8 760 219 000 7,19 0,74 1 574 610 -578 160 672 330 2 246 940

ENOC40YR-11

ENOBase

-25,00 8 760 -219 000 3,41 0,49 -746 790 -521 220 -521 220 -1 268 010

ENOC45YR-11

ENOBase

-50,00 8 760 -438 000 1,91 0,32 -836 580 -788 400 -788 400 -1 624 980

ENOP30YR-

11

ENO

Base

60,00 8 760 -525 600 0,78 -0,13 409 968 -236 520 -99 864 310 104

ENOP33YR-11

ENOBase

15,00 8 760 -131 400 1,50 -0,22 197 100 -99 864 -48 618 148 482

ENOP35YR-11

ENOBase

-75,00 8 760 657 000 2,17 -0,29 -1 425 690 -1 064 340 348 210 -1 077 480

ENOP36YR-11

ENOBase

-50,00 8 760 438 000 2,56 -0,33 -1 121 280 -766 500 275 940 -845 340


25/35

25

Margin and Collateral Summary (CRA report 7)

EUR

Variation Margin ENO Base 45 303 667

CfD-Helsinki 5 247 549

CfD-Stockholm 4 438 306

EDE Base 180 692

CO2 59 350

Sum 55 229 564

Netted Initial Margin ENO Base -244 722 966

CfD-Helsinki -12 662 237

CfD-Stockholm -10 081 574

EDE Base -143 934

CO2 -602 955

Sum -268 213 666

Daily Margin Call ENO Base -199 419 299

CfD-Helsinki -7 414 688

CfD-Stockholm -5 643 268

EDE Base 36 758

CO2 -543 605

Sum -212 984 102

Base Collateral Sum -700 000

Collateral Call Sum -213 684 102

Bank Balance Sum 4 600 930

Guarantee Sum 436 000 000

Security Deposition Sum 0

Guarantee Usage Sum 213 265 842

Security Usage Sum 0

Cash Margin Sum -418 260

Total Cash Settlement Sum 623 191

Total Required Bank Balance Sum 0

Surplus / Deficit Security Sum 0

Surplus / Deficit Guarantee Sum 222 734 158

Surplus / Deficit Bank Balance Sum 4 805 861


26/35

26

6.Appendix 3, RNP

Assume the following position end of trading day t:

Position day tProduct Hours Position Volume Purchase price Closing price Variation Margin

ENOYR-09 8760 -2 -17520 50,4 36,8 237396,0ENOQ1-09 2159 8 17272 55,5 43,8 -202082,4ENOQ2-09 2184 5 10920 47,8 32,8 -164127,6ENOQ3-09 2208 3 6624 46,3 38,8 -49348,8ENOQ4-09 2209 4 8836 51,7 31,6 -177868,7

Net -356031,5

Synthetic closing price YR-09 36,72

The synthetic closing is an hour-weighted closing for the year-09 based on the closing pricesfor the underlying season contracts covering the same delivery period.

The variation margin for ENOYR-09 can be divided into the underlying delivery periods, andthe above position can be shown as follows:

Split of the ENOYR-09 into seasons

MW Hours MWhVariationMargin

ENOYR-09 -2 2159 -4318 58508,9

ENOQ1-09 8 2159 17272 -202082,4

Net Q1 -143573,5

ENOYR-09 -2 2184 -4368 59186,4

ENOQ2-09 5 2184 10920 -164127,6

Net Q2 -104941,2

ENOYR-09 -2 2208 -4416 59836,8

ENOQ3-09 3 2208 6624 -49348,8

Net Q3 10488,0

ENOYR-09 -2 2209 -4418 59863,9

ENOQ4-09 4 2209 8836 -177868,7

Net Q4 -118004,8

Net (a) -356031,5

According to the rules for creating a RNP, the contract on side1 will in this example beENOYR-09 and the contracts on side2 will be the season contracts. The following RNPposition is created:


27/35

27

RNP day tMW Hours MWh Variation Margin

ENOYR-09 -2 2159 -4318 28282,9ENOQ1-09 2 2159 4318 -50520,6

Net Q1 -22237,7

ENOYR-09 -2 2184 -4368 76658,4ENOQ2-09 2 2184 4368 -65651,0

Net Q2 11007,4

ENOYR-09 -2 2208 -4416 51004,8ENOQ3-09 2 2208 4416 -32899,2

Net Q3 18105,6

ENOYR-09 -2 2209 -4418 82837,5ENOQ4-09 2 2209 4418 -88934,3

Net Q4 -6096,8

Net (b) 778,4

The net variation margin for the RNP is EUR 778.4 where the clearing member pays out EUR50520.6 during the Q1 delivery period. Variation margin is fixed as long as the RNP is notaltered. The clearing member will have to place collateral to cover the negative variationmargin, but the initial margin on the RNP will be zero.

The rest position for the clearing member is as follows:

Rest Position day tMW Hours MWh Variation Margin

ENOYR-09 0 2159 0 0

ENOQ1-09 6 2159 12954 -151561,8

ENOYR-09 0 2184 0 0ENOQ2-09 3 2184 6552 -98476,6

ENOYR-09 0 2208 0 0ENOQ3-09 1 2208 2208 -16449,6

ENOYR-09 0 2209 0 0ENOQ4-09 2 2209 4418 -88934,3

Net (c) -355422,3

The position in every contract will be reduced with the same amount of MW used in theRNP, giving the rest position, the same goes for the variation margin.

The net variation margin (b+c) is EUR -354643.9 which is EUR 1387.6 lower than the initialvariation margin of EUR -356031.5. The difference can be explained by that when creatingthe RNP, the year contract is switched into the season contracts at a synthetic price (EUR36.72) and not the years closing price (EUR 36.8). The difference between the prices is again or a loss, in this example a loss, which is locked in when creating the RNP. The lossis calculated the following way: (36.72-38.5)*8760*-2 = 1387.6

.


28/35

28

Net VM (b+c) -354643.9

+Loss on difference -1387.6

Initial VM (a) -356031.5


29/35

29

7.Appendix 4, Cash Margin

Three examples on how the cash margin is calculated for Futures in delivery.

Common for all examples:Position: +10 MWHours: 24

(FCP): EUR 63.4(T) is a trading (and clearing) day.(x) is not a trading day but a calendar day between trading day (T-1) and (T).(y) is not a trading day but a calendar day between trading day (T) and (T+1).(x) and (y) never represent a Saturday, Sunday or a public holiday.

Cash margin for ordinary trading days (except for Mondays and Fridays):Monday 08.3. (T-1)Tuesday 09.3. (T)Wednesday 10.3 (T+1)Thursday 11.3 (T+2)

The cash margin, which will be equal to SRCS is calculated on (T-1) and included in thedaily margin call on (T). When SRCS for trading day (T) is debited/credited on trading day(T+1), the cash margin equals the settlement amount.

Cash margin for (T) calculated on (T-1):SRP_T (determined on T-1):EUR 60.31MW * Hours * (SRP FCP)10 * 24 * (60.31 63.4) = -741.6

The cash margin (EUR -741.6) will be a part of the daily margin call on (T) and equalstrading day Ts SRCS which is debited/credited the bank account on (T+1).

Cash margin for weekends (including Fridays):Thursday 11.3 (T-1)Friday 12.3 (T)Saturday 13.3 (y)Sunday 14.3 (y+1)Monday 15.3 (T+1)

The cash margin for the weekend (T, y and y+1) is calculated on (T-1) and it will be a partof the daily margin call on (T), since SRCS for the weekend is debited/credited the bankaccount on (T+1).

On (T-1), SRP for Saturday (SRP_y) and Sunday (SRP_y+1) is unknown, but NOMXC

estimates the worst-case SRP for (y) and (y+1). The estimation is based on the SRP forFriday (SRP_T), which is known at (T-1).

Estimation of worst-case SRP for y and y+1:

Assume that SRP_T = EUR 55.64

Scanning Range SRP: 30%ScanningRangeSRP equals the maximum risk interval (price change) for electricity contractsin delivery, calculated in SPAN. The figure is what NOMXC reasonably expects the price


30/35

30

movement to be the next day, meaning that NOMXC expects that SRP_T can increase ordecrease by 30%.

Holiday adjustment factor: 10%Observations of the SRP show that the SRP will most likely decrease between a trading dayand a holiday (e.g. between Friday and Saturday/Sunday). The holiday adjustment factor iscalculated based on an average of such observations and is used to adjust the SRP to get

the best feasible estimate of SRP for holidays.

Estimation of worst-case SRP for (y) and (y+1) is calculated based on the following foursteps:

Step 1: Estimate the worst-case change in SRP_y:SRP_T * (1 - Holiday adjustment factor) * ScanningRangeSRP * Sqrt(1),55.64 * (1- 0,1) * 30% * sqrt(1) = 15,02

Step 2: Estimate the worst-case change in SRP_y+1:SRP_T * (1 - Holiday adjustment factor) * ScanningRangeSRP * Sqrt(2),55.64 * (1- 0,1) * 30% * sqrt(2) = 21.18

NOMXC calculates with the sqrt(2) since there is greater uncertainty about the Sundaysspot price

NOTE! When estimating the worst-case change, NOMXC will not use a higher value thensqrt(2) in the equation, i.e. sqrt(3) etc.

Step 3: Estimate the worst-case SRP_y:SRP_T * (1 - Holiday adjustment factor) -/+ worst-case change for SRP_y,55.64 * (1 - 0,1) -/+ 15,02 = 35.06 / 65.1The worst-case SRP_y for this long position is EUR 35.06.

Step 4: Estimate the worst-case SRP_y+1:SRP_T * (1 - Holiday adjustment factor) -/+ worst-case change for SRP_y+1,

55.64 * (1 - 0,1) -/+ 21.18 = 28.9 / 71.26The worst-case SRP_y+1 for this long position is EUR 28.9

Cash margin for weekends (T, y and y+1) calculated on T-1, with a cover margin of 33%

The cover margin is a fixed margin of estimated SRCS.

Calculation of the weekend cash margin is based on the following four steps:

Step 1: Fridays (T) part of the weekend cash margin:10 * 24 * (55.64 63.4) = -1862.4 (as calculated on ordinary trading days).

Step 2: Estimate Saturdays (y) part of the weekend cash margin:MW * hours * (estimated worst-case SRP_y FCP) * cover margin,10 * 24 * (35.06 63.4) * 0,33 = -2244.5

Step 3: Estimate Sundays (y+1) part of the weekend cash margin:MW * hours * (estimated worst-case SRP_y+1 FCP) * cover margin,10 * 24 * (28.9 63.4) * 0,33 = -2732.4

Step 4: Cash margin for weekends:Fridays cash margin + estimated cash margin for Saturday and Sunday,-1862.4 + -2244.5 + -2732.4 = -6839.3


31/35

31

A cash margin of EUR -6839.3 is calculated on (T-1) (Thursday) and included as a part ofthe daily margin call on (T) (Friday) to cover the cash settlement on (T+1) (Monday).

Cash margin for Mondays:Friday 12.3 (T-1)Saturday 13.3 (x)Sunday 14.3 (x+1)

Monday 15.3 (T)Tuesday 16.3 (T+1)

The cash margin for Mondays is calculated in the same way as for an ordinary trading day(see first example above) but the calculation is done on Sunday (y+1) and the cash marginfor Monday (T) will be a part of the daily margin call on (T).

Cash margin in connection with public holidays:

Tuesday 4.5 (T-1)Wednesday 5.5 (T)Thursday 6.5 (y)Friday 7.5 (T+1)

Saturday 8.5 (y+1)Sunday 9.5 (y+2)Monday 10.5 (T+2)

The cash margin for the trading day (T) and the public holiday (y) is calculated on (T-1). Itwill be a part of the daily margin call on (T), since SRCS for (T) and (y) is debited/creditedthe bank account on (T+1). On (T-1), SRP for Thursday (SRP_y) is not known and NOMXCestimates the worst-case SRP for public holiday (y). The estimation is based on the SRP forWednesday (SRP_T), which is known on (T-1). The calculation is done in the same manneras for calculating the cash margin for weekends.

Estimation of worst-case SRP for(y):Assume that SRP_T = EUR 55.92

Scanning Range SRP: 30% (see explanation above).Holiday adjustment factor: 10% (see explanation above).

Estimation of worst-case SRP for y is calculated based on the following two steps:

Step 1: Estimate the worst-case change in SRP_y:SRP_T * (1 Holiday adjustment factor) * ScanningRangeSRP * Sqrt(1),55.92 * (1 0,1) * 30% * sqrt(1) = 15.1

Step 2: Estimate the worst-case SRP_y:SRP_T * (1 Holiday adjustment factor) -/+ worst-case change,55.92 * (1 0,1) -/+ 15,1 = 35.23 / 65.43The worst-case SRP_y for the long position is EUR 65.43

Cash margin in connection with public holidays (T and y) which is calculated on (T-1):Cover margin: 33%

Calculation of the cash margin is based on the following three steps:

Step 1: Wednesdays (T) part of the cash margin:10 * 24 * (55.92 63.4) = -1795.2 (as calculated on ordinary trading days).


32/35

32

Step 2: Estimate Thursdays (y) part of the cash margin:MW * hours * (estimated worst-case SRP_y FCP) * cover margin,10 * 24 * (35.23 63.4) * 0,33 = -2231

Step 3: Cash margin in connection with public holidays:Wednesdays cash margin + estimated cash margin for Thursday,-1795.2+ -2231 = -4026.2

A cash margin of EUR -4026.2 is calculated on T-1 (Tuesday) and included as a part of thedaily margin call on T (Wednesday) to cover the cash settlement on T+1 (Friday).

The cash margin for the weekend is calculated as described above, but the calculation willtake place on y and the margin will be a part of the daily margin call on T+1.

Special circumstances

Appears when the first day of the settlement is a weekend or a public holiday, for instance:

Wednesday 15.5 (T-1)Thursday 16.5 (T)

Friday 17.5 (y)Saturday 18.5 (y+1)Sunday 19.5 (y+2)Monday 20.5 (y+3)Tuesday 21.5 (T+1)

The cash margin for Monday (y+3) is calculated on Wednesday (T-1) and will be a part ofthe margin call on Thursday (T), since settlement for (y+3) is debited/credited the bankaccount on (T+1).

When calculating the cash margin on (T-1) the FCP is not yet known (FCP is fixed on T) andthe FCP must also be estimated. NOMXC uses the contracts calculated worst-case closingprice.

These special circumstances can occur for 24-hour contracts and in connection with theEaster Monday and Whit Monday, and sometimes in connection with Christmas holidays,New Year, Labour Day, Norways Constitution Day and other public holidays when thefinancial market is closed.

Forwards with a Spot Reference Cash Settlement

The cash margin for Forwards with a Spot Reference Cash Settlement is calculated in thesame way as for Futures with a Spot Reference Cash Settlement. The only difference is thatthe cash margin is adjusted for the realized instalment in connection with the expiry marketsettlement for the Forward.

Example 1:Calculated cash margin: EUR 10 000Instalment expiry market settlement: EUR +4500Final cash margin: EUR 5500

Example 2:Calculated cash margin: EUR 10 000Instalment expiry market settlement: EUR -4500Final cash margin: EUR 14500


33/35

33

Example 3:Calculated cash margin: EUR 10 000Instalment expiry market settlement: EUR +15 000Final cash margin: EUR +5000

Net cash margin for Futures and Forwards

When the cash margin for Futures and Forwards is calculated, the cash margins are nettedto reflect a net cash margin for all the derivatives. This implies that a positive cash marginfor Futures reduces a negative cash margin for Forwards, or the other way around. If thesum of the net cash margins is positive, there will not be any cash margin for thecontracts in question.

Example 1:Cash margin Futures with a daily market settlement: EUR 10 000Cash margin Futures with a Spot Reference Cash Settlement: EUR 15 000Cash margin Forwards with a Spot Reference Cash Settlement: EUR 5000

Net cash margin: EUR 30 000

Example 2:Cash margin Futures with a daily market settlement: EUR 10 000Cash margin Futures with a Spot Reference Cash Settlement: EUR 15 000Cash margin Forwards with a Spot Reference Cash Settlement: EUR +5000

Net cash margin: EUR 20000

Example 3:Cash margin Futures with a daily market settlement: EUR 10 000Cash margin Futures with a Spot Reference Cash Settlement: EUR +9000Cash margin Forwards with a Spot Reference Cash Settlement: EUR +5000

Net cash margin: EUR 0


34/35

34

8.Appendix 5, Pricing options using delivery tostrike

Options at Nord Pool are settled according to delivery to strike (dts). Under this method ,the option profit/loss will not be realized until the underlying forward is delivered.The option premium is calculated by using an extra discounting expression for the

commonly used Black76 approach. This adjusted pricing is used for calculation of closingprices and margin setting by Nord Pool.

To adjust pricing of call or put options for dts, one must calculate the option using Black76as if it were cash-settled, then discount the price using the forward rate rf and the timebetween exercise and the start of delivery Tf.

In other words:

cash

Tr

dts

cash

Tr

dts

pep

cec

ff

ff

3652

dttT sdf

where ts and td are the start and end of the delivery period in years, respectively, and d isthe number of days between exercise and start of delivery.

In the delivery to strike (dts) method the holder of a call (put) option who chooses toexercise will receive a long (short) underlying forward contract at the options exerciseprice. The option writer will be registered with the opposite position. Thus the profit/lossremains unrealised until the forward is delivered, either as an open or closed position.

To estimate the correct discount factor to use for discounting dts options, we express it asan average of discount factors,

d

s

f

tT

tT

Tr

sd

ett

1

where ts and td are the start and end of the delivery period in years, respectively, and rf is anew interest parameter (the forward rate between option exercise and delivery). But thiswould quickly become cumbersome for calculation algorithms. Instead, we make theadditional assumption that this can be estimated using a continuous time interval. (Thefunction is not actually continuous, so this will only get us closer to the precise sum, notequal it). When we estimate the discount factor using the integral

d

d

f

t

t

Tr

sd

dTett

1

When solving this ordinary Riemann integral with respect to Tfone arrives at


35/35

dfsf trtrsdf

f eettrr

T

lnlnln1

If ts = 0, this halfway point will be slightly less than 0.5 in realistic interest rates (0% -10%).

Using

3652

dttT sdf

where d is the number of days between exercise and delivery is a good estimation.