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Enron Mail |
Let's talk about this when you get a chance. Mark
----- Forwarded by Mark E Haedicke/HOU/ECT on 08/11/2000 05:04 PM ----- Michael R Brown 08/09/2000 05:48 AM To: Mark E Haedicke/HOU/ECT@ECT, Jeffrey T Hodge/HOU/ECT@ECT cc: Subject: URGENT & IMPORTANT: Note re main legal risks re the EEX Spot Market FYI , some interesting issues on the new exchange . Michael ---------------------- Forwarded by Michael R Brown/LON/ECT on 09/08/2000 11:49 --------------------------- Mark Elliott 08/08/2000 14:59 To: Joe Gold/LON/ECT@ECT cc: Michael R Brown/LON/ECT@ECT, Steve W Young/LON/ECT@ECT, Fernley Dyson/LON/ECT@ECT, Richard Sage/LON/ECT@ECT, Andrew Cornfield/LON/ECT@ECT, Tim Davies/LON/ECT@ECT, Diana Higgins/LON/ECT@ECT, Tina Ward/LON/ECT@ECT, Michael Schuh/FRA/ECT@ECT, Gregor Baumerich/LON/ECT@ECT, Heribert Kresse/FRA/ECT@ECT, Sandip Joshi/LON/ECT@ECT Subject: URGENT & IMPORTANT: Note re main legal risks re the EEX Spot Market Joe, Further to our discussion yesterday, when you mentioned that you wished to commence trading on the EEX Spot Market on and from Wednesday 9th August, I set out below the main elements of legal risk, as I see them, in the various elements of the Exchange Rules. You should note as a general matter that the Exchange Rules are largely vague and ambiguous which only heightens the potential legal legal risk. The Counterparty to our trades Enron's counterparties to trades will be the individual market participants with whom our bids and offers get matched - our counterparty will not be the Exchange itself or a clearing house. We shall only be told the identity of the counterparty(ies) with whom we have neen matched after that matching process has occurred. There is no mechanism to filter counterparties based on credit quality, types of counterparty etc. Hence, there is no effective credit control left to trading participants over whom they should do deals with. Collateral Arrangements As far as security by way of collateral for trading exposures among the participants is concerned, initial collateral of Euros 100,000 is posted with the Exchange in one of the prescribed methods (bank guarantee, cash,etc) via one's "clearing" bank. The Exchange will monitor the exposures of all the counterparties and can require more collateral to be posted overnight, on a variation margin basis, if a counterparty is exposed over the level of collateral previously posted. Note that the collateral which the Exchange may require to be posted does not seem to include cover for any unpaid amounts where a participant has not paid for power delivered - it appears that it will only cover the mark-to-market value of deals struck on the Exchange which remain outstanding (i.e., pre-delivery) In terms of the amount of collateral required to be posted, it would appear that each trade will be calculated on a gross, rather a net, basis (even for buys and sells with the same counterparty and not just trades with different counterparties). The rules are very vague here. I would suggest that your traders and RAC touch base on this issue and understand - by speaking to the Exchange if necessary - exactly the methodology of calculating our collateral posting requirement. Whilst the Exchange will monitor the participants' exposures and call for margin from the Participants' clearing banks as appropriate, there is an obligation imposed on each participant itself to be able itself to monitor its own exposures and its own collateral posting requirement. It is unclear whether the Exchange has provided sufficient information in relation to the model to be used to enable us to fulfill this requirement. I suggest that back office and RAC look into this immediately in conjunction with your trading staff. Technically we can have our membership suspended if we do not comply with the Rules; more importantly, from a good buisness practice perspective, we should be able to comply with the rules plus be able to know these figures each day. RAC and your traders should therefore check that we can do this immediately. In the event that a counterparty defaults, there are two points to note. Firstly, what constitutes a default is unclear. The Rules state that a default is where a counterparty is, to quote, "unable" to meet its obligations under the Rules. Strictly, inability (e.g., insolvency) would not cover unwillingness (e.g.,, counterparty can pay but does not wish to pay for whatever reason). Clifford Chance Germany have advised me that they feel that a German court would stretch the meaning to include unwillingness to meet obligations but, of course, point out that this would be for a judge ultimately to decide. Secondly, even if a counterparty is in default as defined, there is no absolute legal obligation on the EEX to realise / call upon the collateral posted with it. This will depend upon whether the management board of the EEX exercsies a discretion to instruct the EEX to do so. In my view. the Exchange could well take the view that as the trades are a matter between the individual participants (as the Exchange is not the counterparty), the Exchange may well be unwilling to realise collateral until the outcome of arbitration between the parties to a dispute. Clearly this could be a number of weeks or months after the non-payment dispute arose and hence increasing our credit risk. Please note that there is no clear recourse to the Exchange in the event that the Exchange itself refuses to realise collateral. If the Exchange does realise the collateral however, it will hold it for the benefit of all Participants. Note, however, that this does not seem to cover previously unpaid amounts as mentioned above. Taxes End consumers can be participants on the Exchange. As this is the case, if we get matched with an end consumer, then apparently we open ourselves up to potential liability to pay German energy taxes. Clifford Chance have advise me that, whilst this remains an unresolved issue, apparently the German fiscal authorities appear only to ensure that German-based entities pay such tax, rather than foreign-based ones such as ECTRL, which is our trading participant. If you require further details on this, please refer to Tina Ward in Tax Department. Renewable Energy Sources Act. Again, if we, as a seller, were matched with an end-consumer, then under this Act we are obliged to ensure that we source approximately 3.45% of the energy sold from a renewable source. I understand that this is approximately 4 times as expensive as normal domestic power, coming in at around 16.75 pfennigs per kWh. It is entirely unclear how this will be monitored and enforced in respect of dealings on the Exchange, although Cliffords' view is that this will be done in some way through the Balancing mechanism. May be your traders should look into this in greater detail, should it be of concern. Settlement On a purely logistical level, for your general information, please note that physical power delivery is T+1, whereas Buyer settles T+2. The Exchange states that bills from sellers to buyers will go to the buyers via the Exchnage. It is unclear how the mechanics of this work (they are not dealt with in the Rules to any greater extent). I would suggest that your trading staff and our settlements staff look into this immediately, by speaking directly to the Exchange if necessary. It should also be borne in mind that I assume that invoices will have to raised and issued within the T+2 framework. IMPORTANT NOTE: Clearly we want eventually to put this trading participation thorough a formal and final CACs process (the rules have totally altered since we CACs'd it last time three weeks ago). However, I understand that you would like to be able to trade from tomorrow, which will be a few days in advance of the CACs process (additional rules in German have only just been sent to me, and hence I cannot tell you at present what is the import of these). In this respect, please note that ECTRL is joining as a Market-Maker and hence, under the Exchange Rules, if you wish to proceed, we would have the obligation from tomorrow to quote firm two way prices during normal market opening hours. The Exchange can promulgate rules prescribing the length of time for which bids / offers are active, minimum / maximum volumes bid / offerred, the width of spreads, etc.,.; I understand from Clifford Chance that the Exchange has not yet prescribed these rules. What we do know at the moment is that if we fail "too often" to quote as a market maker, then the exchange can remove / suspend us as a trading participant. In order to mitigate your risk at present therefore, you may wish to consider the size of volumes we would quote and width of spreads, etc.., and discuss with RAC and / or Credit beforehand. Finally, I understand that: (a) Dresdner's banking terms for us have still not been agreed (apparently these are being dealt with at an Enron Houston Legal Department level) and therefore I cannot tell you whether Dresdner would be willing to provide the collateral guarantee etc before these are agreed and (b) I understand that the EEX still has some outstanding points re our Balancing arrangements which would need to be finalised before we could trade. Sandip is in contact with Enron Houston over (a) and I understand that Heribert and Michael Schuh are dealing with the Balancing arrangements. Subject to clearing the items in (a) and (b), and discussing volumes, spread etc with RAC / Credit etc., if you wish to proceed tomorrow, please let me know as I shall need to write to the Exchange this afternoon informing them of this (our application forms were submitted under the caveat that we would write to them when we wished our membership to go active). Kind regards Mark
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