The Market Implementation Committee endorsed a first-ever credit requirement for up-to-congestion transactions. The new rule, a consensus resulting from 12 Credit Subcommittee meetings since December 2011, will be brought before the Markets and Reliability Committee May 30.
Reason for Change:
UTC trading volumes have grown dramatically since 2010 but there are no credit requirements to protect market participants against defaults.
Impact: Bid screen and cleared portfolio credit requirements are based on a percentile of the difference between each member’s bid or cleared price and the two-month rolling average of real-time value per path.
Bid Screen Credit:
- Prevailing flow paths: 70th percentile
- Counterflow paths: 80th percentile
Cleared Portfolio Credit:
- Prevailing flow paths: 70th percentile
- Counterflow paths: 95th percentile
Minimum Financial Participation Requirements — the same minimum requirements as for increment and decrement transactions:
- tangible net worth of at least $500,000 or
- tangible assets of at least $5 million, or
- posting $200,000 of financial security against which the member may not trade, plus a 10% reduction in additional collateral.
PJM analyzed the impact of the proposals against trading results for April 2011, July 2012, and Jan. 2013 to evaluate shoulder, summer and winter periods. It also looked at how they fared against the largest losses in the 10-month period between Jan. 1 and Oct. 31, 2012.
The proposal covered 95% or more of bid exposure for each scenario except for January 2013, when it covered 82%. Excess collateral ranged from a low of $1.9 million (January 2012) to a high of $8 million (July 2012). Excess collateral is concentrated in members with high bid volumes. (See chart.)
