Project "Clearing Services for the Brazilian Power Market"

1. Presentation ECC
Project „Clearing Services for the
Brazilian Power Market“
Dr. Thomas Siegl – Chief Risk Officer ECC thomas.siegl@ecc.de
Dr. Götz Dittrich – Head of Clearing Strategy goetz.dittrich@ecc.de
©ECC AG – Any use of information contained in this document is expressly prohibited without prior written consent of ECC AG

2. ECC overview
History
Spin-off of the EEX clearing department to ECC AG
Launch of clearing services for the Dutch Energy Derivatives Exchange (APX-ENDEX)
European Commodity
Clearing Luxembourg S.à.r.l.
Launch of clearing services for the French Energy Exchange Powernext
Start of clearing services for newly launched energy exchanges:
France: EPEX Spot SE
Austria: CEGH Gas Exchange
Integration of Luxembourg-based subsidiary into delivery chain;
Establishment of ECC Lux as agent for deliveries
Clearing services (Spot) for Hungarian Power Exchange HUPX
July 2011: launch of HUPX Futures Market2010
2008
2009
2006
2012
Clearing services for Power Exchange Central Europe PXE
clearing start planned for mid 2013
2

3. ECC Overview
International network of markets and products
ECC Clearing of
Power & Gas
in Europe
Power
Power&Gas
New Market
3
Power Power Spot Delivery
Power
Futures
Netherland
Belgium
UK
France
Germany
Switzerland
Austria
Hungary
Romania
Czech/ Slovakia
Gas Gas Spot Delivery Gas Futures
Netherland
UK
France
Germany
Austria
Business Line Products Exchange
Emissions
Futures & Spot: EUA(A), CER
Futures: ERU
Coal Futures: API2, API 4
Options Phelix Power
Market Coupling EMCC/CWE + SL/HU
©ECC AG – Any use of information contained in this document is expressly prohibited without prior written consent of ECC AG

4. • Shareholders of ECC are
• EEX 98.5%,
• Powernext 1.5%.
• EEX itself has 40 shareholders,
• majority shareholding with 56% by Eurex / Deutsche Börse
• Shares are also held by market participants
The benefits of clearing to energy markets
Clearing house governance follows international standards
• ECC is a CCP acc. to §1,31 German Banking Act
• ECC holds a German banking license
• ECC is a Designated Payment system
• Supervision by Central Bank and German FSA
• Compliance with various international standards
• Management board with dedicated roles and responsibilities
• Supervisory board: supervises the management board
• Risk Committee: advises both boards as independent risk experts
Regulatory
Supervision
Shareholder
Governance

5. Why a clearing house?
Key Differences OTC to Exchange Trading
OTC Trading
Trader 1
Trader 2
Trader 3
Trader 4
Trader 5
Trader 6
Trader 1
Trader 2
Trader 3
Trader 4
Trader 5
Trader 6
Exchange
CCP
Exchange Trading
• Need for counterparty limits
• Limited standardisation
• No transparency
• Limited number of selectable
trading counterparties
• No equality of market participants
• Anonymity (equal treatment)
• Clear rules and price transparency
• Trading with all members of the
exchange (concentrated liquidity)
• Straight-through processing
• Clearing
5©ECC AG – Any use of information contained in this document is expressly prohibited without prior written consent of ECC AG

6.  Necessary for anonymous (exchange) trading
ECC is the contractual partner for both sides
 Reduction / Elimination of credit and legal risks
ECC operates a margin system for guaranteed fulfilment
 Clearing provides transparency and high operational security
ECC sets the standard which is tailored to the trading practice
 Financial and physical settlement services
ECC supports the trading participants and is single point of contact
for all clearing & settlement related questions:
24 hours a day, 7 days a week
 Reduction of technical interfaces
ECC has established uniform processes & interfaces to a network of
partners:
Integration of new markets with minimal client effort
Why use Clearing?
Rationale

7.  No Counterparty Credit Risk
No need to check counterparties for credit quality for credit limits
(all participants collateralize their own credit risk)
Increased number of possible counterparties for trading
(equal access to the whole network of participants)
Existing credit limits are free for other exposures
(e.g. for non standardized contracts)
 Increased competition for best prices
Increased number of possible counterparties means more
competition for prices.
 Equal treatment of participants generate representative indices
As all counterparties can trade on the same prices, spot price information is
generally valid as an index for derivatives. These price indices are protected
against manipulation and form a reliable basis for long term hedging of market
participants.
Why use Clearing?
Advantages of clearing
©ECC AG – Any use of information contained in this document is expressly prohibited without prior written consent of ECC AG

8. 8
Trading Participant
Non-Clearing Member (NCM)
Collateral + payment
(via Clearing Member)
Delivery
(via Registration CCEE)
Trade Registration
(via exchange)
ECC
interposes
itself between
buyer and
seller through
„Open Offer“
process
ECC registers physical
electricity deliveries with
CCEE
Conclusion of
exchange trade
or registration of
OTC
transaction
Delivery via entry
and exit contracts
with hub operator
Financial Settlement of trades
+
Posting of Collateral
Contractual Flow with Energy Specifics

9. 9
Trading Participant
Non-Clearing Member (NCM)
Collateral + payment
(via Clearing Member)
Delivery
(via Registration CCEE)
Trade Registration
(via exchange)
ECC
interposes
itself between
buyer and
seller through
„Open Offer“
process
ECC registers physical
electricity deliveries with
CCEE
Conclusion of
exchange trade
or registration of
OTC
transaction
Delivery via entry
and exit contracts
with hub operator
Financial Settlement of trades
+
Posting of Collateral
Energy specifics
- Nomination
- Non Storable Commodity
- Tax implications on
deliveries
- Treatment of balancing
energy
Contractual Flow with Energy Specifics
©ECC AG – Any use of information contained in this document is expressly prohibited without prior written consent of ECC AG

10. STP Trade
Interface
Offering integrated, straight-through clearing for OTC, financial, spot and derivatives
• Front end for User Trade Entry
• Automated Trade Import through STP interfaces to exchanges and trade venues
STP Physical
Settlement
ECC is a specialist for the physical settlement of grid-bound energy and emissions
• Technical STP connections to various transmission system operators
• Nominations, scheduling and market coupling for the pan-European Energy
• Full trade anonymity guaranteed in settlement process, ECC steps into delivery.
Efficient Financial
Settlement
Mitigating settlement risks
• EUR settlement via the European Central Bank => in Brazil a Commercial Bank is likely
• ECC is a Designated Payment System i.e. Payments to ECC would be irrevocable =>
similar setup in Brazil
10
Risk Management
• Calculate Margins, evaluate risk
• Issue Intraday Margin Calls
Work Flow with Energy Specifics
Default Process
In case of failure of financial settlement (default or insolvency) or failure of physical
settlement
• Transfer clients of Clearing Members
• Buy in to replace contracts to ensure smooth functioning for other participants
• Liquidate collateral and use risk management lines of defense

11. The default scenario
Lines of Defense
All figures as of 9th November 2012
• Various layers ensuring a central counterparty protection.
• ECC has a financial resource and collateral pool of more than 1200 mln EUR.
• ECC meets easily international required minimum standards for central counterparties.
ECC Capital (after fund)
25.5 mln EUR
Replenishment
104 mln EUR
Member Default Fund
104 mln EUR
ECC‘s share Default Fund
3 mln EUR
Margin Collateral
927 mln EUR
Variation Margin and spot settlement
Intraday Margin Calls
Traders guaranteed by clearer
more than 300 trading participants (NCM)
Membership acceptance criteria
e.g. capital 7.5 mln EUR (Self-Clearer), 30 mln EUR general clearer
Level 1:
Membership
Level 2:
Individual
Liability
(all)
Level 3:
Joint
Liability
(CMs)
Level 4:
Recovery
11
Proven lines of
defense
©ECC AG – Any use of information contained in this document is expressly prohibited without prior written consent of ECC AG

12. Summary
• Using a central counterpart provides
• A high degree of security for the market and its participants
• Possibility for anonymous trading
• Support of an exchange as the basis for transparent and reliable trading
and price formation
• Possibility to construct an reference energy price index
• Use of ECC allows for very high and proven efficiency
• Designated Payment System for irrevocability of payments
• Collateral Requirements optimized for efficiency
• State of the art solution corresponding to highest standards including
international regulatory standards as CPSS / IOSCO or FBOT
• Payment cycles being close to the trading and delivery moment reduces
the risk of losses and the necessary collateral deposit requirements
• ECC is acting as a specialized clearing house for energy and energy related
commodities with a deep market knowledge
• ECC has a strong track record in aligning different energy market places with a
high degree of efficiency and transparency
• Support efficient product implementation
Role of a CCP
Role of ECC