FAQ

Frequently asked questions 

Collateral calls

What components does a collateral call consist of?

The collateral call is the total margin call to be covered by collateral and is defined as follows:

collateral call = base collateral call daily margin call extraordinary margin call

Where;

- the base collateral call is an up-front collateral, described below
- the daily margin call reflects the actual risk on open positions, delivery and settlement
the extraordinary margin call is issued in special circumstances, and is to be covered within a short notice

Please also see margining solution and the clearing rules.

When is a collateral call issued, and when shall it be covered?

There are two collateral calls per clearing day:
The end-of-day margin call based on the previous day’s positions issued at 08:00 and the intra-day margin call calculated at 11:00 when the DAM results are available. The intra-day margin call is issued at 12:00, at the latest. The calls have to be covered by collateral before (Final Collateral Time) 11:00 (end-of-day) and 14:30 (intra-day).
 

A clearing schedule, showing the relevant deadlines is available in the clearing rules.

What is the base collateral call?

The base collateral call is an up - front minimum collateral to be posted before trading can commence, and each member is obliged to estimate its own base collateral call in co-operation with the clearinghouse.

The base collateral call is designed to limit the clearing house’s overnight risk for the expected cost of closing out a defaulting member’s contracts, which are not collateralized until the next clearing day, and typically covers:

• the risk of tradable contracts where collateral is due the next clearing day.
• the risk during non-clearing days (weekends and long holidays)

The base collateral call for a buyer (net long position) covers the overnight market risk and settlement risk. For a seller (net short position) the base collateral call covers overnight market risk and delivery risk.

How is the base collateral call calculated?

The base collateral call is calculated according to the following:

base collateral long = daily overnight position long (MWh) * volatility long(£) * day factor long

base collateral short = daily overnight position short (MWh) * volatility short(£) * day factor short

Where:
- daily overnight position(MWh) is to be decided by the participant
- volatility long= £90 at launch of N2EX
- volatility short= £150 at launch of N2EX
- day factor long = 3 at launch of N2EX
- day factor short = 3 at launch of N2EX

The final base collateral call is determined as the highest amount of the results from the calculations above. The clearing house expects that each participant sets a base collateral level which is not changed on a regular basis.

How should the base Collateral call be covered?

The base collateral call must be covered by cash on the cash collateral account, and/or through an on demand bank guarantee/letter of credit, as defined in the N2EX collateral agreements.

Please also see margining solution and the clearingrules.

Collateral and accounts

Can a letter of credit/bank Guarantee cover the complete margin amount?

A letter of credit/bank guarantee can be utilized to meet the total margin requirement, but a cash collateral account must be opened in order to cover any urgent need for increasing the collateral.

Do members need a cash settlement account in any case?

Yes, a cash settlement account is needed for the daily cash settlements (pay-out from the clearing house).

Whose name should the cash collateral be in?

The cash collateral account is to be created in your company’s name, and will be charged to the benefit of the clearing house. This is regulated in the collateral security deed which is part of the membership agreements.

Why must the cash collateral account and the cash settlement account be opened in a bank that is connected to CHAPS?

CHAPS is necessary in order to make sure that the participants can guarantee:

• settlement payments to the clearinghouse settlement account and;
• cover any deficits on the Cash Collateral account

within the deadlines set by the clearinghouse. Since N2EX is located in the UK and the settlement is in pound sterling, CHAPS is the most secure payment system to comply with these demands.