Commodities Futures Trading Commission (CFTC) ExemptionProposals for Settlements and Billing Changes

COPSJune 14, 2011

Cheryl Yager, Mandy Bauld, Leslie Wiley

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Overview

• CFTC 4(c) Exemption• FERC Credit Rule and ERCOT Rules• Impact of NPRR 347• Other actions to consider• Reduce settlements from 10 days to 9 days• Reduce payment timeline from 3 to 2 bank business days• ACH volumes• Other payment options considered• Summary

COPSJune 14, 2011

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ERCOT along with other ISO/RTOs began a conversation with CFTC last year to discuss applying for an exemption from CFTC jurisdictional oversight of ISO/RTO markets– Potential requirements of ISO/RTOs for obtaining CFTC

exemption• FERC Credit Rule – The CFTC preliminarily seems to view

favorably the requirements of the FERC Credit Rule

• While not under FERC Jurisdiction, compliance with the FERC Order helps ERCOT make progress towards the exemption

– Dodd Frank becomes effective incrementally in the second half 2011; CFTC exemption must be obtained within a comparable timeframe

– CFTC exemption may be contingent on ERCOT making changes to existing Protocols, systems, etc. in a timely manner

COPSJune 14, 2011

CFTC 4(c) Exemption

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FERC Credit Rule and ERCOT Rules

Shortening Settlement CycleFERC Rule • 14 Days; • Billing periods of no more than seven days and settlement periods of no more than

seven days after issuance of bills.

 

ERCOT Rule• Day Ahead Market settlement cycle is consistent with FERC Credit Rule (with

possible exception of certain holiday periods);• Real Time settlement cycle 21-31 days, including payment cycle (NPRR 347 in

process reduces this to 14-21 days );• Other monthly billings

Potential Changes Required to be Consistent with FERC Rule• Reduce settlement cycle to 14 days, billing periods of no more than seven days and

settlement periods of no more than seven days after issuance of bills– Change to ERCOT Protocols– System change

COPSJune 14, 2011

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Impact of NPRR 347

• NPRR 347 will

– Reduce the number of days in the settlement process by eliminating the lag between real time settlement statements and invoicing

– Eliminate 2 bank business days from the payment process

– Invoice activity for DAM and RTM (I/F/TU) settlements posting on the same day into a single invoice which posts on that same day

• After NPRR 347, ERCOT anticipates (based on 2011 calendar), that approximately 82% of operating days will be settled within 16 days and the weighted average days to settle will be approximately 16 days

COPSJune 14, 2011

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Impact of NPRR 347

COPSJune 14, 2011

# of Days OD to Payout

# ofOccurrences

PercentageOf Total

Cumulative Percentage

14 43 11.78% 11.78%

15 43 11.78% 23.56%

16 214 58.63% 82.19%

17 36 9.86% 92.05%

18 15 4.11% 96.16%

19 9 2.47% 98.63%

20 4 1.10% 99.73%

21 1 0.27% 100%

• RTM Initial Statements post on OD + 10

• Settlement Invoice due on 3rd Bank Business Day (i.e., all DAM and RTM payments are due 3 Bank Business Days after the associated settlement statement posts)

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Additional actions to consider

• Reduce RTM Initial Settlement from 10 days to 9 days– Leave Data Aggregation on OD + 7 (same as current)– This change shortens the schedule but still minimizes the impact

to processes and/or accuracy

• Reduce the payment timeline for the single daily Settlement Invoice (includes DAM and RTM activity) from 3 to 2 Bank Business Days– This change has an impact on ability to use ACH

• With the above changes (in addition to the changes in NPRR347), ERCOT anticipates (based on 2011 calendar), that approximately 88% of operating days will be settled within 14 days and the weighted average days to settle will be approximately 13.5 days (remaining 12% impacted by weekends and/or holidays falling within the cycle)

COPSJune 14, 2011

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Reduce RTM Initial Settlement Timeline

• RTM Initial Statements post on OD + 9

• No adjustment to the Settlement Invoice Due Date

COPSJune 14, 2011

# of Days OD to Payout

# ofOccurrences

Percentage of Total

Cumulative Percentage

13 45 12.33% 12.33%

14 45 12.33% 24.66%

15 212 58.08% 82.74%

16 37 10.14% 92.88%

17 13 3.56% 96.44%

18 8 2.19% 98.63%

19 4 1.10% 99.73%

20 1 0.27% 100.00%

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Reduce RTM Initial Settlement Timeline & Payment Timeline

COPSJune 14, 2011

# of Days OD to Payout

# ofOccurrences

Percentage of Total

Cumulative Percentage

12 95 26.03% 26.03%

13 50 13.70% 39.73%

14 178 48.77% 88.49%

15 30 8.22% 96.71%

16 9 2.47% 99.18%

17 2 0.55% 99.73%

18 1 0.27% 100.00%

• RTM Initial Statements post on OD + 9• Settlement Invoice Due Date adjusted to 2 Bank Business Days after

Invoice posts (i.e., all DAM and RTM payments are due 2 Bank Business Days after the associated settlement statement posts)

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Reduce payment timeline from 3 to 2 bank business days

• Tightening the payment timeline will impact the ability to use ACH as a payment mechanism– Impact is noted on the following page

• Consider elimination of ACH as a payment option– The CFTC expectation is that “money settlements are final when

effected” (e.g. “good funds”). ACH transactions do not meet this requirement.

– Also, ACH transactions can be reversed at the CPs discretion within 5 days of transaction (2 day prepayment based on expectation that reversals may occur only within 2 days), creating credit risk

COPSJune 14, 2011

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ACH volumes

Month Percentage of transaction volume by ACH

Percentage of dollars volume received by ACH

March 7.16% 0.68%

April 7.39% 1.28%

May 7.58% 0.37%

There are approximately 7 market participants who currently use ACH.

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Other payment options considered

Payment Type Funds Availability

Risk Other items to consider

Wire Immediately None

Reverse Wire Same day Funds will be available same day, but bank notifies us by email if any NSFs are found. This will not meet noon deadline.

Market participants will still be charged a wire fee.

ACH 5 days ERCOT will be notified within 2 days if NSF, but market participant has up to 5 days to recall.

Prepay Immediately Manual process to turn around payment.

Credit Card 1-2 days Market participant still has option to dispute payment.

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Summary

ERCOT to initiate an NPRR(s) to:• Reduce settlements from 10 days to 9 days• Reduce payment timeline from 3 to 2 bank business days

– including elimination of ACH as a payment option

• With the above changes, ERCOT anticipates (based on 2011 calendar), that approximately 88% of operating days will be settled within 14 days

• Request that COPS send the topic to SEWG next week to provide opportunity for further discussion prior to ERCOT filing the NPRR