How does the clearing of OTC products work?
The European Energy Exchange AG (EEX) started trading in electricity and other products in 2000. The main trading segments are the derivatives market. Spot trading is carried out by a subsidiary (EPEX Spot).
According to the Stock Exchange Act, EEX is subject to public law with three main organs. These are the Exchange Council, the Management of the Exchange and the Trading Surveillance Office.
The Exchange Council represents the individual members, which are made up of energy supply companies, trading houses, transmission system operators, consumers and banks. In addition, the Exchange Council adopts the rules of the exchange or makes adjustments. He appoints the members of the exchange management and also appoints the management of the trading surveillance office.
The exchange management of EEX is responsible for the smooth running of trading. She manages the day-to-day business and is responsible for the approval of new products and new trading participants.
The trading surveillance office acts independently of these two bodies and monitors all transactions carried out on EEX and, in the event of a suspicion of a violation of the exchange rules, follows up the process. If the suspected case is confirmed, the trading surveillance office reports directly to the management, which is then responsible for sanctioning. The trading surveillance office itself is not entitled to impose sanctions on exchange participants.
In addition, the private law part of EEX AG consists of a supervisory board, a management board and the various departments. Profits may only be earned in the private law part.
In principle, participation in trading on EEX is voluntary and freely accessible to everyone in accordance with the Stock Exchange Act and is non-discriminatory. The admission of individual dealers takes place through the acceptance of a written entrance examination.
Clearing on the stock exchange
Since the stock exchange is the central contractual partner, the stock exchange assumes the default risk of its customers, i.e. should one of the contractual partners go bankrupt, the stock exchange takes over for their obligations. This is an advantage of exchange trading compared to OTC transactions because the exchange takes on the risk of default.
This is made possible by a subsidiary, European Commodity Clearing AG, ECC AG, which is always the central trading partner between the parties. In the event of a party defaulting on payment, also known as credit risk or counterparty risk, European Commodity Clearing AG (ECC AG) guarantees the other party to fully offset the losses. The processes involved in stock exchange trading are shown in Figure 1.
In return, the ECC therefore demands security payments from all participants. These so-called margins must at least correspond to the potential outstanding debts of each participant. They are to be deposited each time a position is opened and are bound for the entire contract period. This covers the risk of the maximum costs incurred for closing out all open positions of a trading participant on the next trading day, assuming the most unfavorable price development. The physical processing corresponds to the processing in OTC trading. However, ECC always sends timetables to the responsible network operator.
Figure 1: Exchange trading processes, source: Energy Brainpool
In the OTC market, the players exchange electricity contracts directly. However, the exchange issues standardized forward products for OTC trading, which correspond to the EEX futures. These EEX forwards can also be processed via the clearing house of the exchange and thus offer the same financial security as exchange transactions.
How do clearing and settlement work on the exchange?
As a subsidiary of EEX AG, European Commodity Clearing AG (ECC AG) carries out a transparent and standardized procedure for the offsetting of receivables and liabilities (clearing) and the fulfillment of transactions (settlement).
Clearing means the offsetting and offsetting of receivables from stock exchange transactions. In particular, this includes the financial processing and the recording of the deposited securities. Due to the large number of stock exchange transactions, clearing activities also take place after the close of trading.
Settlement is the fulfillment of a transaction, i.e. the delivery, booking and consumption of the good electricity, as well as the associated payment. The clearing of ECC AG significantly simplifies processes and thus trading for participants. In addition, ECC AG minimizes the risk of counterparty default by guaranteeing the assumption of liabilities that may not be covered.
In addition to the standardized products that are traded on the OTC Spot and OTC Derivatives Market, contracts for individual hours can also be exchanged on EEX in spot market trading, as Figure 2 shows.
Figure 2: Tradable products on the stock exchange and OTC platforms, source: Energy Brainpool
Both on the EEX and on the OTC market, in addition to contracts for electricity deliveries, products with other base values can also be traded. These are coal, natural gas, emission certificates, guarantees of origin and others.
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