Last updated 18.11.

2011



















CALCULATION OF COLLATERAL CALL

AND SETTLEMENT OF

FINANCIAL

POWER CONTRACTS
















Related Documents:

1) Clearing Rules for Commodity Derivatives:
www.nasdaqomxcommodities.com/membership/legalframework/

2) SPAN parameter file:
www.nasdaqomxcommodities.com/clearing/riskmanagement/spanparameterfiles



2
1. Introduction ........................................................................................................ 3
1.1 NASDAQ OMX Commodities an Overview ......................................................... 3
1.2 Information Provided by NASDAQ OMX Commodities ............................................ 3
1.3 Basic Features ................................................................................................. 3
1.4 SPAN

............................................................................................................ 3
2. Calculation of the Collateral Call ............................................................................ 4
2.1 Base Collateral ................................................................................................. 4
2.2 Group Risk ...................................................................................................... 4
2.3 Variation Margin ............................................................................................... 4
2.4 Initial Margin ................................................................................................... 5
Risk Intervals 5
Time Spread (correlation) 5
Delta Netting 5
Inter Commodity Spread Credit 6
2.5 Cash Margin .................................................................................................... 6
2.6 Collateral Rules ................................................................................................ 6
2.7 SPAN

parameters ........................................................................................... 6
Standard Deviation 7
Risk Interval Multiplier 7
Correlation Matrix 7
Marginal Value Time Spread 7
High and Low Implied Volatility 7
Routines for Revising the SPAN

-parameters 8
3. Calculating Daily Margin Calls using SPAN

............................................................. 8
3.1 Calculating the Variation Margin ......................................................................... 8
3.2 Calculating the scanning range ........................................................................ 10
3.3 Calculating the risk array ................................................................................ 10
3.4 Calculating the Initial Margin ........................................................................... 11
3.4.1 Example of Initial Margin for a Forward and an Option Contract 12
3.5 Calculating Time spread .................................................................................. 14
Example of a correlation matrix, historical correlation between delivery periods 14
Example of time spread position: 16
3.6 Calculating Time Spread with Delta Netting ....................................................... 16
3.7 Calculating Inter Commodity Spread Credit ....................................................... 17
3.8 Risk Neutral Positions ..................................................................................... 18
Delivery Margin 18
Example of RNP for one Delivery Period 19
3.9 Calculating Group Risk .................................................................................... 19
3.10 Calculating Cash Margin ............................................................................... 19
Definitions of phrases 19
Futures with a daily market settlement 19
Futures with a Spot Reference Cash Settlement 20
Forwards with a Spot Reference Cash Settlement 20
Net Cash Margin for Futures and Forwards 20
3.11 Summary of the Margin Call ......................................................................... 20
4. Appendix 1, Settlement ...................................................................................... 21
5. Appendix 2, Risk Report ..................................................................................... 24
6. Appendix 3, RNP................................................................................................ 26
7. Appendix 4, Cash Margin .................................................................................... 29
8. Appendix 5, Pricing options using delivery to strike ............................................. 34



3
1. Introduction
As a clearing house, NASDAQ OMX Commodities (NOMXC) enters into a trade as central
counterparty vis--vis the initial buyer and seller. In order to handle the counterparty risk,
NOMXC calculates a daily margin call for each member (in this document the expression
member also includes clearing clients) covering their risk in open positions and pending
settlements. The aim of this document is to describe NOMXC margin call calculations for
financial power contracts. The settlement procedure is left for Appendix 1.

The first part of this document provides a basic overview of the margin calculation. The
second part explains these principles in more detail, while the third part illustrates the
margin call calculation process step-by-step. Appendix 1 explains the settlements in all
products and Appendix 2 gives an example of the SPAN

calculation. Appendix 3 explains

risk neutral positions in depth, Appendix 4 contains cash margin calculations and Appendix
5 contains information regarding options pricing.
1.1 NASDAQ OMX Commodities an Overview
NASDAQ OMX Commodities is the brand name for the commodities division within the
NASDAQ OMX Group, Inc, and offers a worldwide suite of commodity related products and
services. The NASDAQ OMX Commodities offerings include power, natural gas and carbon
emissions markets and clearing services. NASDAQ OMX Commodities Europe provides
access to the worlds largest power derivatives exchange and one of Europes leading carbon
markets through NASDAQ OMX Commodities Europe.
1.2 Information Provided by NASDAQ OMX Commodities
All members receive daily reports on their trades, net positions, margin calls and settlement
of their market positions. Monthly lists are distributed for accounting purposes.
1.3 Basic Features
A members portfolio may consist of future, forward, CfD, and option contracts. The various
derivatives are grouped so that the derivatives with the same underlying reference price
(system price) are in the same risk group. For each risk group a margin call is calculated.
CfDs are divided into separate groups, one per price area. The sum of the margin calls for
all the group risks is equal to the daily margin call.
1.4 SPAN

As a clearing house, NOMXC risk is that a counterparty may not be able to fulfil its future
obligations. To reduce this risk, NOMXC requires all members to post collaterals for their
obligations. NOMXC uses SPAN

to calculate the size of collateral requirements.

SPAN

, which is an abbreviation for Standard Portfolio Analysis of Risk, is a system for

calculating margin calls developed by the Chicago Mercantile Exchange in the US.
Introduced in 1988, SPAN

is used by more than 30 exchanges and clearing houses

worldwide
1
.

The starting point for calculating margin call with the SPAN

system is the following

question: "How much can NOMXC acting as contractual counterparty reasonably
expect to lose if a member cannot meet the collateral requirements for its positions and the

1 London SPAN

, implemented by the London Clearing House, is among the best-known versions of SPAN

. The
SPAN

version is developed specifically for financial power contracts based on the SPAN

-methodology.



4
market simultaneously moves in an unfavourable direction?" NOMXC uses both historical
data on price fluctuations and recognised pricing models to make these calculations. If a
member fails to post adequate collaterals, NOMXC has the right to close positions in the
market on the account and risk of the member.

The collateral posted by each member must be adequate to cover portfolio losses that might
arise before the next collateral call on the following trading day, should the market move in
an unfavourable direction. NOMXC requires each member to post collateral covering worst-
case portfolio losses.

2. Calculation of the Collateral Call
The collateral call consists of the base collateral and the daily margin call. There are three
different components in the daily margin call that are summed up to a group risk. These
are: variation margin, delivery margin and initial margin. A cash margin is calculated as a
part of the group risk. The components of the collateral call are described below.
2.1 Base Collateral
NOMXC requires a base collateral to cover overnight risk, i.e. the risk due to the fact that
the daily margin call is not confirmed until 11:00 CET the next trading day. It is based on
the customers financial strength and its open interest at NOMXC. The base collateral call
must be posted before clearing may commence.
2.2 Group Risk
The group risk shows the aggregated margin call for the financial power contracts included
in the group. The spot reference price (the price against which power contracts are settled
in the delivery period) determines to which group a power contract belongs. All products
within one group are sorted in delivery periods and netted into one net position for each
delivery period.

The group risk consists of various risk groups out of which the largest one contains power
contracts with reference to the Elspot system price.

Moreover there are separate groups for CfDs (Contracts for Difference) between the areas
and system price for the areas Oslo, Stockholm, Helsinki, Copenhagen, rhus,
Troms, Lule, Sundsvall and Malm.,

These groups formulate the Sum Group Risk Derivatives/cash margin, which is the total
daily margin call for one clearing member.

If the Sum Group Risk has a negative value, the member has a margin call that needs to
be covered by cash or a guarantee.
2.3 Variation Margin
The variation margin is the cost for liquidating the portfolio at the prevailing market price.
Liquidating the portfolio is to sell bought options, futures and forwards and buy back the
sold options, sold futures and forwards.

Forward contracts are mark-to-market every day in the trading period, but the physical
cash settlement is not done until the contracts delivery period. This means that an
unrealised gain or loss for forward contracts in the portfolio is accumulated. The unrealised


5
settlement can be locked in by closing the position(s) and is treated in SPAN

as variation
margin for forward and CfD contracts.

Futures are subject to a daily mark-to-market and cash settlement. The variation margin
for futures will always be zero in the security calculation.

A forward in delivery will continue as one contract during the delivery period.
2.4 Initial Margin
Initial margin (risk scenario) states how much the open positions in the portfolio can change
in value at the least favourable price development within a risk interval (price change
interval).

Risk Intervals
The risk intervals reflect the maximum expected price movement for the power contracts
during a certain close-out horizon (lead days) and within a certain confidence interval. It is
based on historical volatility along with other variables. The risk interval is calculated
according to the formula below:

Risk Interval (% of closing price) = Daily Volatility (%) * 3 * SQRT(d)

where; the Daily Volatility is estimated by the Clearing House, the factor 3 represents 3
standard deviations (gives a 99.7% confidence) and d is the number of days in the close-
out horizon (lead days).

The risk interval relating to the option depends on several parameters: implied volatility,
price on the underlying contract, closing price on the option, and expected change in the
implied volatility and price of the underlying for the next day.

Based on the risk interval, SPAN

calculates 16 different risk scenarios for one net position

(futures, forward and options). The model chooses a scenario that gives the largest
potential loss for the net position. This is done for all net positions in the portfolio and the
sum total of the scenarios (always negative) makes up the initial margin for the portfolio
before netting due to time spread (correlation) and inter commodity spread credit.

Time Spread (correlation)
The time spread determines to what extent the initial margin can be reduced due to the
correlation between power contracts with different delivery periods and opposite positions.
Time spread netting is applied for most of the risk groups. There is only netting within the
groups, not between them.

The correlation between couples of time spread periods are based on historical prices and
sorted according to the most favourable time spread, i.e. the delivery periods with the
highest correlation are netted first. For some delivery periods a correlation approaching 1
between two delivery periods can be found, which means that the periods correlate almost
completely and that a change in the closing price in one of the delivery periods is reflected
by almost exactly the same percentage price change in the other delivery period.

Delta Netting
The Clearinghouse allows crediting or netting between two time spread periods with an
opposite net MW (energy) exposure. For futures and forwards the delta is always 1, and
these contracts contribute with their entire energy when netting between time spread


6
periods. For options on the other hand, the delta depends on the price of the underlying
instrument.

Inter Commodity Spread Credit
The Clearinghouse may also allow for netting of Initial Margin between markets (risk
groups). The method is called Inter Commodity Spread Credit (ICSC) and builds on the
delta ratio and a credit spread which are defined for pairs of time spread periods (tiers)
belonging to different risk groups, allowed to be included in the ICSC.

Contracts which are determined to have a large enough correlation are included in the ICSC.
The ICSC is described in depth at:
http://www.nasdaqomxcommodities.com/digitalAssets/67/67891_intercommodityspreadcre
dit.pdf.
2.5 Cash Margin
The cash margin is a proportion of the daily margin call, which must be covered by cash to
assure daily market settlement.
2.6 Collateral Rules
The rules for collateral are described in the Clearing Rules. The collateral rules regulate the
calculation of the margin call. The parameters going into the margin call calculation can be
changed within one hours notice to the members.

Collateral may be posted either as cash on a pledged cash account or as on demand
guarantees issued by a financial institution approved by NOMXC. NOMXC calculates the size
of each members collateral call on a daily basis. In the event of special market conditions,
NOMXC may calculate and demand extraordinary collateral in accordance with the rulebook.
2.7 SPAN

parameters
In SPAN

, a number of parameters are used for the calculation of the margin call, primary
initial margin and crediting, or netting, based on time spread (correlation) and inter-
commodity spread credit.

The following parameters are included in the SPAN

model:

1. Standard deviation
2. Risk interval multiplier
3. Correlation matrix
4. Marginal value time spread
5. High and low (implied) volatility
6. Delta/Spread ratio
7. Currency conversion rate
8. Upper and lower limit for risk interval (excluding CfDs)
9. Upper and lower limit for implied volatility (options)
10. Augmentation integers for CfDs
11. Extreme scenarios
12. Coverage rate extreme scenarios
13. Price models options contracts
14. Risk free interest rate



7
Of the parameters listed above, numbers 1-7 are the most important to the margin call
calculation and will be described further below.


Standard Deviation
The standard deviation reflects the daily volatility in the different delivery periods and is
central to the calculation of the initial margin. Power contracts have a limited length of life
and the closer the contract gets to the start of the delivery period the higher the volatility.
Because of this, the standard deviation is based on the number of days remaining to the
start date and stop date of the delivery period, not each individual power contract. The
calculation method gives a broad collection of data and the result can be used for all
delivery periods. The standard deviation is calculated for 21 different observational points
corresponding to the number of days to the start or stop of the delivery period; 1, 8, 15,
22, 29, 36, 43, 50, 57, 85, 113, 141, 169,., 1095, 1500 and 1800. The number of days to
start and stop is plotted against the volatility matrix and the standard deviation is calculated
based on weighting. The standard deviation is calculated on the preceding 12 months, i.e.
approximately 250 trading days.

Risk Interval Multiplier
The risk interval multiplier is used in the calculation of the risk interval. It is an outcome of
multiplying 3 (number of standard deviations) with square root of number of days in a
close-out period (lead days). In accordance with statistical theory, a multiplier of 3 gives a
confidence interval of 99,7%. Number of days in a close-out period is separately estimated
for each market and depends on the products liquidity among other factors. In SPAN

the
standard deviation is multiplied by the risk interval multiplier and the result gives a risk
interval that is used in the risk matrix. The risk interval is thus expected to cover 99,7% of
price movements in a defined close-out period. The risk interval is further employed in the
calculation of the initial margin.

Correlation Matrix
The correlation between opposite positions in different delivery periods is very important to
the degree of crediting, or reduction, when netting scenario risk of the delivery periods. The
correlation matrix has the same observational points as the standard deviation and is also
calculated based on the preceding 12 months.

Marginal Value Time Spread
The marginal value is important to the degree of crediting of the initial margin. The values
are based on the correlation between delivery periods given by the correlation matrix and
define the correlation interval that leads to crediting. A correlation over 0,95 p.t. gives
almost full crediting but the degree of crediting drops (number of allowed steps increases)
with a decreasing correlation.

High and Low Implied Volatility
Volatility is included in the risk calculation for Options contracts and establishes how much
NOMXC expects the implied volatility to change at the most from one day to another.

Delta/Spread Ratio
The delta ratio used in inter commodity spread credit shows the relation between risk
intervals for the contracts in different risk groups. A credit spread is a credit factor in %
which is based on correlation. These two parameters determine how much the initial margin
can be reduced due to the inter commodity spread credit.




8
Currency Conversion Rate
The currency conversion rate is used in margin calculations for contracts in a currency
different from the margin currency. There are different rates used for the conversion of
initial and variation margin with a positive and negative sign from quotation currency to
margin calculation currency.

Routines for Revising the SPAN

-parameters
The SPAN

parameters are continuously evaluated and revised by NOMXC when needed

2
.

NOMXC conducts an evaluation of parameters against existing observations and decides if
an update is needed. Essential differences in the observations or incidents in the market will
result in a change. NOMXC does not operate within absolute limits for essentials in this
context, but conducts a total evaluation from time to time.

According to the Clearing Rules, all parameters can be changed within one hours notice, if a
change is called for.


3. Calculating Daily Margin Calls using SPAN

Computing collateral requirements using SPAN

is a multi-step process:

1. Calculating variation margin for each derivative (loss/gain for NOMXC upon
realisation of the portfolio).
2. Calculating price-scanning range for the underlying instruments (maximum
anticipated price movement of future and forward contracts until the next trading
day).
3. Calculating risk array for each derivative series (theoretical values of derivatives in
different market scenarios based on the scanning range). The risk calculation for
options is performed based on the underlying instrument's scanning range.
4. Calculating initial margin for each derivative (anticipated largest reasonable loss on
the portfolio given a worst-case scenario).
5. Calculating time spread (crediting of initial margin due to correlation between price
changes in different delivery periods with opposite positions.).
6. Calculating inter commodity spread credit (crediting of initial margin due to
correlation between price changes on the contracts in different risk groups)
7. Calculating group risk (totalling variation margin, initial margin, and a delivery
margin for each risk group).
8. Calculating cash margin requirement.
9. Calculating the total collateral call as the sum of net initial margin, variation margin,
delivery margin and base collateral.
3.1 Calculating the Variation Margin

As described in the introduction, in liquidating positions and conducting close-out of
transactions, purchased options are credited according to daily closing prices. Sold options
are debited in the same way. Futures in the trading period are settled mark-to-market
every day and hence the variation margin for futures in the trading period is always zero,
whereas for forward and CfD contracts it is the amount calculated as the Expiry Market
Settlement in the daily Transaction and Settlement list.

2 All parameters used in calculating security requirements, such as the price scanning range, the volatility range,
and the choice of theoretical pricing models for options, are determined by NASDAQ OMX Commodities.


9

The variation margin for a future, forward or CfD contract in the delivery period is based on
the adjusted (synthetic) market value for the contract. This means that the variation margin
is adjusted every clearing day to reflect the non-paid part of the Spot Reference Cash
Settlement and the Expiry Market Settlement.

For the future contract in the delivery period, the final closing price for the week contract is
currently used as the adjusted (synthetic) closing price during the entire delivery period for
the week contract. Hence, the variation margin for the future week contract in the delivery
period is equal to zero.

The adjusted (synthetic) market value for the forward contract in delivery is calculated as
an hourly weighted average of the underlying prices using this formula:




where:

S=daily closing price for future contracts included in the calculation basis
O=number of hours in the future contracts included in the calculation basis
F=number of delivery hours remaining in the forward or futures contracts for the delivery
period in question
m=first overlapping future contract
n=last overlapping future contract

In this formula, the closing prices for the longest available contracts are used. This means
that closing prices for the week contract in delivery are used rather than the daily closing
prices for the day contract. The hours for the actual position day are not included in the
calculation. As an example, the calculation for ENOMOCT-11 at position date 13
th
October
2011 includes the final closing price of ENOW41-11 (72 hours left), the closing prices of
ENOW42-11 (168 hours), the closing price for ENOW43-11 (169 hours) and ENOW44-11 (24
hours).

For the CfDs Month contracts, the adjusted (synthetic) closing price for the CfD Month-
contract is a subject to the following components:

where:

D=the difference between the relevant spot reference prices
h=number of quoting days for the spot reference price included in the calculation basis
c=closing price for the relevant CfD with delivery the next month
3


If the contract currency is different from the margin currency, variation margin has to be
converted into a margin currency. In this case the high (low) exchange rate is used when
converting a negative (positive) number. The variation margin is converted per position in
the contract series.

3 The Clearinghouse may apply another formula that what is set out above to calculate the adjusted market value
if the Clearinghouse believes that the prices do not reflect the adjusted market value of the product series


10
3.2 Calculating the scanning range
The price scanning range reflects the maximum anticipated price movement for Futures,
Forward and CfD contracts during a certain close-out period. Historical price data for
derivatives with the same trading time horizons are the starting point for determining the
price scanning range interval. The scanning range is a risk interval expressed in currency.
3.3 Calculating the risk array
SPAN

generates a risk array based on the price scanning range calculations. The factors
used in these calculations of theoretical values are seven different prices for the derivative
within the scanning range, implemented under two volatility levels, and two extreme prices
for the derivative or underlying derivative that exceed the scanning range (extreme
scenarios). Scenario price intervals (up and down) determine the overall price scanning
range.

For each of the seven prices in the scanning range, a theoretical value is calculated at a
higher expected volatility, and a value is calculated for a lower expected volatility. In these
examples, high volatility would be implied volatility x Volatility multiplier up, and low
volatility would be implied volatility x Volatility multiplier down. The volatilities are
calculated in the same way for call and put options.

Implied option volatility is used to calculate the theoretical values for the two extreme-price
scenarios; Black-76 is used for this purpose. For option contracts with delivery of the
underlying to the strike, the value from standard Black-76 model will be adjusted with an
interest rate factor. This discount factor takes into account that the value of the option at
expiry will be paid out over the delivery period of the underlying contract (please see
Enclosure 5).

The following 16 different scenarios constitute the standard SPAN

risk array for Options.

Scenario Price of underlying
instrument
Volatility
1 Unchanged Up
2 Unchanged Down
3 Up 1/3 of price scan range Up
4 Up 1/3 of price scan range Down
5 Down 1/3 of price scan range Up
6 Down 1/3 of price scan range Down
7 Up 2/3 of price scan range Up
8 Up 2/3 of price scan range Down
9 Down 2/3 of price scan range Up
10 Down 2/3 of price scan range Down
11 Up 3/3 of price scan range Up
12 Up 3/3 of price scan range Down
13 Down 3/3 of price scan range Up
14 Down 3/3 of price scan range Down
15 Up, extreme price move Unchanged
16 Down, extreme price move Unchanged



11
SPAN always compares high volatility for one product with high volatility for the other
product (delivery period)

This means that if we look at volatility up we get the following scenarios:

Scenario 16 13 9 5 1 3 7 11 15
Price of
underlying
instrument
Down,
extreme
price move
Down 3/3 of
price
scan range
Down 2/3 of
price
scan range
Down 1/3 of
price
scan range
Unchanged Up 1/3 of
price
scan range
Up 2/3
of
price
scan
range
U Up 3/3 of
price
scan range
Up,
extreme
price
move

For volatility down we have:

Scenario 16 14 10 6 2 4 8 12 15
Price of
underlying
instrument
Down,
extreme
price move
Down 3/3 of
price
scan range
Down 2/3 of
price
scan range
Down 1/3
of
price
scan range
Unchange
d
Up 1/3 of
price
scan range
Up 2/3
of
price
scan
range
U Up 3/3 of
price
scan range
Up,
extreme
price
move

3.4 Calculating the Initial Margin
The initial margin should state how much the open positions in the portfolio can change in
value at the least favourable price development within a risk interval.

The first step is to calculate the value of the open positions for the next trading day. The
calculation uses the theoretical prices from the risk array as its starting point, and shows
the value of the portfolio under the 16 market scenarios.

The risk array is calculated using historical volatility and implied volatility. In order to handle
price movements within a certain confidence interval, a risk interval multiplier
4
is used (in
this example 6,7).


Days Annual volatility Daily volatility Risk interval
1 57,03 % 2,99 % 20,00 %
8 57,03 % 2,99 % 20,00 %
15 57,03 % 2,99 % 20,00 %
22 54,18 % 2,84 % 19,00 %
29 54,18 % 2,84 % 19,00 %
36 54,18 % 2,84 % 19,00 %
43 48,47 % 2,54 % 17,00 %
50 48,47 % 2,54 % 17,00 %
57 45,62 % 2,39 % 16,00 %
85 42,78 % 2,24 % 15,00 %
113 42,78 % 2,24 % 15,00 %
141 37,06 % 1,94 % 13,00 %
169 37,06 % 1,94 % 13,00 %
197 31,37 % 1,64 % 11,00 %

4 To get the actual figure, please contact clearing.risk@nasdaqomx.com


12
225 31,37 % 1,64 % 11,00 %
337 25,66 % 1,34 % 9,00 %
393 25,66 % 1,34 % 9,00 %
540 25,66 % 1,34 % 9,00 %
603 22,81 % 1,19 % 8,00 %
729 22,81 % 1,19 % 8,00 %
1095 19,96 % 1,05 % 7,00 %
1500 18,53 % 0,97 % 6,50 %
1800 13,00 % 0,97 % 6,50 %


As illustrated above a contract with 15 days to delivery will have a risk interval of 20,00 %

The 16 risk scenarios constituting a risk array are calculated as follows:

- Each risk array value is the difference between the next-day value for the risk array
scenario and today's value of the derivatives.

- By calculating these values for all the scenarios found in the array, the scenario
generating the greatest potential loss becomes apparent. This scenario's loss
constitutes the initial margin, which is one of the individual Group Risk components
for calculating a members portfolio risk.

The risk interval for a delivery period where the number of days to the middle of the
delivery period is between two observations is calculated as follows:

For a delivery period with 19 days to start of delivery and delivery ending at day 25, SPAN

has the following approach: 3/7 of the period derives from the 15 days to delivery
observations and 4/7 from 22 days to delivery.

This results in a risk interval of 3/7*20,00%+4/7*19,00% = 19,43%

If a member has a contract in a currency different from the margin currency, a risk interval
in a contract currency is converted into a price change interval given in margin currency by
multiplying the risk interval with the exchange rate, adjusted with an exchange rate risk
parameter. This is a currency risk parameter that is added or subtracted from the
exchange rate when converting risk from one currency to another (for example, EUR to
GBP). If the parameter is set to 2,5% NOMXC will add 2,5% to the exchange rate if the risk
has a negative sign and subtract 2,5% from the exchange rate if the risk has a positive
sign.

The numbers in the risk interval are rounded off to two decimals before the initial margin is
calculated. For examples on margin currency conversion see
http://www.nasdaqomxcommodities.com/clearing/riskmanagement/margining/.

3.4.1 Example of Initial Margin for a Forward and an Option Contract
Implied volatility is not a parameter in the pricing of forward contracts, which results in 9
scenarios whereas for options there are 16. Theoretical values of option contracts are
calculated for low and high implied volatilities. Multipliers for high and low volatilities as well
as closing values of forward and option contracts are available in SPAN

.


13

Scenario Theoretical
closing price
Implied
volatility
Theoretical change
ENOYR-11
1 42,65 - 0
2 -
3 44,17 - 1,52
4 -
5 41,13 - -1,52
6 -
7 45,68 - 3,03
8 -
9 39,62 - -3,03
10 -
11 47,2 - 4,55
12 -
13 38,1 - -4,55
14 -
15 56,3 - 13,65
16 29 - -13,65


Scenario Theoretical closing
price
Implied Theoretical
value
ENOC40YR-11
Theoretical
value change
ENOC40YR-11
For underlying prod. volatility
1 42,65 35,86 % 6,54 0,46
2 30,64 % 5,80 -0,28
3 44,17 35,86 % 7,50 1,42
4 30,64 % 6,77 0,69
5 41,13 35,86 % 5,63 -0,45
6 30,64 % 4,89 -1,19
7 45,68 35,86 % 8,52 2,44
8 30,64 % 7,81 1,73
9 39,62 35,86 % 4,79 -1,29
10 30,64 % 4,06 -2,02
11 47,2 35,86 % 9,59 3,51
12 30,64 % 8,91 2,83
13 38,1 35,86 % 4,02 -2,06
14 30,64 % 3,31 -2,77
15 51,75 32,60 % 16,53 10,45
16 29 32,60 % 0,68 -5,4*
*worst case scenario for this Option




14
3.5 Calculating Time spread
Thus far in calculating the margin call, no account has been taken with regards to the
correlation in price development between different delivery periods. Such price correlation
could reduce a portfolio's margin call. As mentioned before, time spread calculations are
only applied for some of the risk groups.

Historical price developments show varying degrees of correlation among different delivery
periods. For example we should, theoretically, be able to identify a (perfect) correlation of
1.00 between two delivery periods. This would mean that the contracts correlate
completely; a change in the closing price for one of the contracts will be reflected in exactly
the same percentage price movement in the other contract.

For portfolios with opposite exposures in different delivery periods, SPAN

will take
correlation into account. Correlation between pairs of delivery periods will be calculated
based on historical price development and sorted according to most favourable time spread
i.e., those delivery periods with the greatest degree of correlation producing the greatest
offset. NOMXC determines the parameters as to correlations that are to be recognised, how
the greatest offset is achieved, and the magnitude of correlation-based offsetting that can
be achieved between different underlying delivery periods.

For a pair of correlating delivery periods the volume credited is maximized to the energy
volume for the period with the smallest volume in MWh. For the remaining delivery hours
not affected by the time spread, the initial margin will not change compared to the primary
initial margin calculation.

Example of a correlation matrix, historical correlation between delivery periods

0 1 8 15 22 29 36 43 50 57 85 113 141 169 197 225
1 1 0,388 0,455 0,401 0,381 0,228 0,376 0,374 0,490 0,386 0,380 0,370 0,371 0,389 0,366
8 1 0,976 0,966 0,969 0,944 0,934 0,938 0,940 0,900 0,900 0,793 0,772 0,788 0,688
15 1 0,980 0,988 0,980 0,965 0,942 0,940 0,900 0,900 0,844 0,838 0,789 0,680
22 1 0,980 0,980 0,969 0,943 0,940 0,920 0,915 0,843 0,843 0,780 0,676
29 1 0,981 0,981 0,980 0,941 0,921 0,921 0,843 0,843 0,822 0,670
36 1 0,988 0,988 0,971 0,940 0,922 0,843 0,843 0,826 0,681
43 1 0,992 0,978 0,940 0,922 0,844 0,844 0,835 0,682
50 1 0,993 0,943 0,931 0,887 0,860 0,841 0,688
57 1 0,976 0,940 0,896 0,861 0,840 0,688
85 1 0,945 0,940 0,841 0,843 0,722
113 1 0,943 0,942 0,855 0,733
141 1 0,944 0,857 0,812
169 1 0,896 0,886
197 1 0,899
225 1
337
393


NOMXC will calculate historical correlation between different delivery time horizons and
determine parameters for crediting. Based on the 16 scenarios found in the risk array, the
task is to identify the worst-case scenario for the delivery period in question.

Given full crediting of correlation, it is appropriate to select the same scenario for both
delivery periods. If, historically, a lower correlation between the two delivery periods in
question has been calculated for example 0.85 this lower correlation would entail a
lower degree of crediting. The process of establishing parameters for crediting determines
which risk scenario is to be evaluated. In all, six such parameters (called marginal values)


15
are determined. A correlation of 0.5 equates to a parameter of 0.3, (or 3 steps). This means
that based on the worst-case scenario for one delivery period the process will search within
the three closest scenarios for the other delivery period and find the worst-case scenario. It
is important to note that search is only done within the same volatility scenario.


The marginal values for the correlation are in this example:

0,95=0 step, 0,85=1 step, 0,7=2 steps, 0,5=3 steps, 0,4=4 steps, 0,3=5 steps

Crediting two periods with a correlation of 0,83 where the worst case for the first delivery
period is scenario 5, the process search to combine this with scenario: 13, 9, 5, 1 and 3.

Vol.up starting with scenario 5 as a worst case for the first delivery period
Scenario 16 13 9 5 1 3 7 11 15
Price of
underlying
instrument
Down,
extreme
price move
Down 3/3 of
price
scan range
Down 2/3 of
price
scan range
Down 1/3
of
price
scan range
Unchange
d
Up 1/3 of
price
scan range
Up 2/3
of
price
scan
range
U Up 3/3 of
price
scan range
Up,
extreme
price
move

Scenario 16 13 9 5 1 3 7 11 15
Price of
underlying
instrument
Down,
extreme
price move
Down 3/3 of
price
scan range
Down 2/3 of
price
scan range
Down 1/3
of
price
scan range
Unchange
d
Up 1/3 of
price
scan range
Up 2/3
of
price
scan
range
U Up 3/3 of
price
scan range
Up,
extreme
price
move


Vol.down starting with scenario 6 as worst case for the first delivery period.
Scenario 16 14 10 6 2 4 8 12 15
Price of
underlying
instrument
Down,
extreme
price move
Down 3/3 of
price
scan range
Down 2/3 of
price
scan range
Down 1/3
of
price
scan range
Unchange
d
Up 1/3 of
price
scan range
Up 2/3
of
price
scan
range
U Up 3/3 of
price
scan range
Up,
extreme
price
move

Scenario 16 14 10 6 2 4 8 12 15
Price of
underlying
instrument
Down,
extreme
price move
Down 3/3 of
price
scan range
Down 2/3 of
price
scan range
Down 1/3
of
price
scan range
Unchange
d
Up 1/3 of
price
scan range
Up 2/3
of
price
scan
range
U Up 3/3 of
price
scan range
Up,
extreme
price
move




16
Example of time spread position:


3.6 Calculating Time Spread with Delta Netting
The margin methodology allows netting between time spread (delivery) periods if the net
MW (energy) exposure are opposite between the two periods.
For futures and forwards, the delta is always 1, and these contracts contribute with their
entire energy when netting between time spread periods. For options on the other hand, the
delta depends on the price for the underlying instrument.
Delta Netting means that the delta for options are calculated based on a probability-
weighted average of a set of deltas calculated for the options (a) after the look-ahead time
has passed (normally one day) and (b) according to possible price changes for the
underlying instrument. The delta found is called the composite delta.
Delta netting gives a good estimate on each members net exposure in the different time
spread periods. Delta Netting means that the options contribute with a more correct energy
amount instead of using either 1 or 1 as the options delta. Delta Netting results in a more
correct netting of energy between time spread periods.
The margin methodology defines nine price scenarios and these represent possible forward
prices for the look-ahead time. Nine delta values are calculated for the option contract,
using the different price scenarios for the underlying forward.
A weighted average of these deltas is then taken; using the predetermined weights for the
different scenarios. This weighted delta decides how much energy the option contributes
within the netting.
In effect, a composite delta value represents an estimate of what the contracts delta will be
after the look-ahead time has passed. The composite delta for each option will be presented
in the risk parameter file.
The predetermined delta weights are calculated based on the probability for each and one of
the underlying price scenarios. The delta weights are fixed for all options and summarize to
1.

Scanning
range
Closing
price
Hours
(1 MW)
-50 MW ENOMJUN-09 7.15 35.11 720
+61 MW ENOQ3-09 6.98 36.6 2208
Time spread
MW MWh -Extreme -3/3 -2/3 -1/3 0 +1/3 +2/3 +3/3 +Extreme
-50 -36,000 231,660 257,400 171,600 85,800 0 -85,800 -171,600 -257,400 -231,660
16 36,000 -226,152 -251,280 -167,520 -83,760 0 83,760 167,520 251,280 226,152
5,508 6,120 4,080 2,040 0 -2,040 -4,080 -6,120 -5,508
-89,880
45 98,688 -619,958 -688,842 -459,228 -229,614 0 229,614 459,228 688,842 619,958
-778,722
-1,197,522
Effect of time spread -418,800
01/04/2009 Date
01.06.2009-30.06.2009
01.07.2009-30.09.2009
Corr. = 0,94 ("1 step")
Initial margin Rest
Initial margin "Worst case" (+3/3 & +2/3)
01.07.2009-30.9.2004
Sum Initial Margin
Initial margin without time spread


17
Examples of delta weights can be presented as follows:
Delta point Price scenario
underlying forward
Change in
Volatility
Weight
1 - 3/3 0 0,01
2 - 2/3 0 0,06
3 - 1/3 0 0,24
4 0 (no change) 0 0,38
5 + 1/3 0 0,24
6 + 2/3 0 0,06
7 + 3/3 0 0,01
8 + extreme move 0 0,00
9 - extreme move 0 0,00


A simplified example of calculating net energy in a time spread period
Assume the following position and composite deltas:
ENOC27YR-11
+100 MW
Composite delta equals +0,9

ENOP27YR-11
+99 MW
Composite delta equals -0,7

The net energy for the time spread period equals:
+0,9*100*8760 + (-0.7)*99*8760 = +181 322 MWh

In the current method, the net energy delta for the time spread period equals:
+1*100*8760 + (-1)*99*8760 = +8 760 MWh

The delta netting will affect the amount of energy netted between time spread (delivery)
periods.
3.7 Calculating Inter Commodity Spread Credit

NOMXC allows for inter-commodity netting to optimize the daily margin call for clearing
members. By giving a credit to offset positions in products with sustained price correlation
when calculating margin, significant collateral benefits are offered to clearing members.

Inter commodity spread netting is applied between products in the same asset class (e.g.
Nordic Base forwards and German base forwards) and products from separate asset classes
(e.g. Nordic Base forward and allowances).

Inter commodity spread credit is introduced after all possible netting effects within each risk
group are extracted. It is implemented on contract level. The list of contracts which can
participate in inter commodity spread calculation is available on


18
http://www.nasdaqomxcommodities.com/digitalAssets/67/67896_icsc.pdf.The contracts are
split down to smaller tradable products and credit will be given to the smallest tradable
contracts. The smallest component are weekly contracts (day contracts are not the part of
the inter commodity spread credit). Monthly contracts will be broken down to weekly
contracts, but the credit effect will take place for the synthetic month contracts.

In calculating inter commodity spread credit NOMXC will go through the portfolio after a
complete netting of each risk group and list remaining delta for each contract. If a product
can take part in inter-commodity spread credit, the product will get a tier connected to its
name. The system will make a list of all possible credits based on the priority between the
different tiers (the higher the credit, the higher the priority). For the details see
http://www.nasdaqomxcommodities.com/digitalAssets/67/67891_intercommodityspreadcre
dit.pdf.
3.8 Risk Neutral Positions
Besides time spread and inter commodity spread credit, Risk Neutral Positions (RNPs) could
also reduce a portfolios margin call. As the name says this is a position where forward
contracts with opposite signs can neutralize each others risk given certain conditions.
Only forwards are allowed to participate in a RNP. A RNP consists of two sides. All contracts
on both sides must belong to the same risk group. Side 1 should always be one contract,
which has the longest delivery period, while side 2 should have contracts with combined
delivery periods that exactly match the delivery period on side 1. All contracts defined on
the same side must have the same sign and the opposite sign compared to the other side.
This gives us the following allowed combinations:

1. Forward year contract against forward quarter contracts covering the same year
(delivery period)
2. Forward quarter contracts against forward month contracts in the same quarter and
year (delivery period)

When creating a side 1 for the RNP, contracts with the longest delivery period will always be
prioritised before contracts with a shorter delivery period.

The number of MW allowed in a RNP is equal to the lowest absolute position on side 1 or
side 2.

NOMXC will calculate a new RNP every day to reflect last trading days new trades.

Delivery Margin

A delivery margin will be calculated if NOMXC is exposed to a potential cost of financing the
variation margin cash-flow of the risk neutral position, but RNP positions will per definition
give a zero initial margin.










19
Example of RNP for one Delivery Period





Example of variation margin for the delivery period 01.04.2009 30.06.2009:

(-2/-2) * (2184/8760)* 237396 + (2/5) * (-164127.6) + (-2) * 2184 * (36.75-36.8)=
-6246.2

The same type of calculation will apply for the rest of the delivery periods creating the RNP.

The variation margin for the RNP will be unchanged as long as the RNP is unchanged. If a
portfolio only consists of a RNP, the group risk for the portfolio will be unchanged as long as
the RNP exists unchanged. For a more detailed example, please see Appendix 3.
3.9 Calculating Group Risk
Having taken into account time spread and inter commodity spread credit, the final Group
Risk will appear as the sum of initial margin credited (netted) due to time spread and inter
commodity spread credit and initial margin for the remaining delivery periods/hours not
affected by time spread and inter commodity spread credit.
3.10 Calculating Cash Margin
The cash margin is a proportion of daily margin call, which must be covered by cash to
assure daily market settlement. Please see Appendix 4 for more details.

Definitions of phrases

Final Closing Price (FCP): A volume-weighted average of the exchange-trading price in a
product series, used for settlement purposes.

Spot Reference Cash Settlement (SRCS): Settlement between Forward buyer and
Forward seller, or Futures buyer and Futures seller, for the differences between final closing
price and the spot reference prices in the delivery period.

Spot Reference Price (SRP): A daily reference (spot) price set by Nord Pool Spot AS.

Futures with a daily market settlement
The cash margin for futures with a daily market settlement is fixed at 33% of the calculated
initial margin. As an example, if the isolated initial margin for the futures is EUR 150 000,
the clearing member must deposit EUR 49 500 in cash at a cash account to cover the
margin.
Position day t
Product Hours Position Closing price Variation Margin
ENOYR-09 8760 -2 36,8 237396,0
ENOQ1-09 2159 8 43,8 -202082,4
ENOQ2-09 2184 5 32,8 -164127,6
ENOQ3-09 2208 3 38,8 -49348,8
ENOQ4-09 2209 4 31,6 -177868,7
Net

-356031,5



Synthetic closing price YR-09 36,75
side 1
side 2


20

Futures with a Spot Reference Cash Settlement
The cash margin should, in the best possible way, reflect SRCS for the future. SRCS is
calculated as the difference between SRP and FCP for the future. SRCS for trading day (T) is
debited/credited the bank account in the morning the next trading day (T+1), before the
final collateral time at 11:00 a.m.

In general, SRCS can be calculated the day before trading day (T) (see above) because SRP
is known in the market at noon (Nord Pool Spot sets the system price at about 13:00 CET)
the day before. The cash margins for futures in delivery can therefore accurately reflect
SRCS for the contract.

Forwards with a Spot Reference Cash Settlement
Cash margin is only applicable for forwards in delivery. The cash margin for forwards with a
SRCS is calculated in the same way as for futures with a SRCS. The only difference is that
the cash margin is adjusted for the realized instalment in connection with the Expiry Market
Settlement for the forward.

Net Cash Margin for Futures and Forwards
When the cash margin for futures and forwards is calculated, the cash margins are netted to
reflect a net cash margin for all the derivatives. This implies that a positive cash margin
for futures reduces a negative cash margin for forwards, or the other way around. If the
sum of the net cash margins is positive, there will not be any cash margin for the
contracts in question.
3.11 Summary of the Margin Call
The total group risk for a member is the sum of the group risk for each of the groups.
Please see the following example where the member, in addition to cash on a pledged cash
account, has posted a guarantee in MEUR as collateral. The guarantee is used first, when
covering the margin call. The cash margin is calculated as a part of the Sum Group Risk
and is in this example covered by the cash required due to the group risk. Please note that
this is just an example. The numbers can therefore be not accurate.


Date: 19.03.2010 Required Guarantee coverage Cash required
Base collateral -2 000 000 2 000 000
Group Risk System Derivatives 10 000 000
Group Risk Stockholm Derivatives -2 000 000
Group Risk Oslo Derivatives 1 000 000
Group Risk CfD Aarhus Forwards -1 000 000
Group Risk CfD Copenhagen Forwards -3 000 000
Group Risk CfD Helsinki Forwards -1 000 000
Group Risk CfD Oslo Forwards -1 500 000
Group Risk CfD Stockholm Forwards -3 500 000
Sum Group Risk Derivatives -1 000 000 -1 000 000
Total settlement amount -1 000 000 -1 000 000
Total required account balance -2 000 000
Cash margin -100 000


21
4. Appendix 1, Settlement


Settlement for financial derivatives
Example:
On 10
th
of March 2010, a member entered into the following contracts:

- Bought Futures contract 15 MW ENOW11-10; EUR 61.75
- Sold Forward contract 20 MW ENOQ2-10; EUR 46.75
- Sold European-style call Option 10 MW ENOCQ30JUN0-30; EUR 14.62

On 11
th
of March 2010, the member received EUR 327 220 in cash settlement from NOMXC
for this portfolio.

Futures Expiry Market Settlement (trading period)
The Futures contract daily settlement reflects the change in market value from one day to
the next. The value is settled daily through each members cash account.

Example: continued
- Daily closing price on 10

Mar 2010 ENOW11-10 EUR 61.75
- Daily closing price on 11

Mar 2010 ENOW11-10 EUR 63.5

[(Daily closing price t) minus (Daily closing price t-1)] x contract size
5
x hours in the
delivery period = Futures contract settlement

Futures expiry market settlement on 11 Mar. 2010 = (63.5 61.75) x 15 MW x 168 h =
EUR 4410

On the day of the trade, the Futures Expiry Market Settlement is calculated as the daily
closing price less the contract price, whereas on other days, the difference between daily
closing prices on the last two trading days is used.

Spot Reference Cash Settlement (delivery period)
Forward and Futures contracts kept until expiry day are settled financially each day in the
delivery period. The Spot Reference Cash Settlement for a specific contract is calculated as
the difference between its final closing price and spot reference price.

Example, continued
- Final closing price ENOW11-10: EUR 63.4
- Spot reference price Mar.21 2010: EUR 49.67

[(Spot reference price) minus (Final closing price)] x contract size
6
x hours in the delivery
period = Spot Reference Cash Settlement

Spot Reference Cash Settlement Mar.21 2010 = (63.4 - 49.67) x 15 MW x 24 h = EUR
4942.8


5 with sign
6 with sign


22
Calculating Forward Expiry Market Settlement (trading period)
For Forwards, daily price changes for the contract are calculated in the same way as for
Futures contracts. However, no cash settlement is conducted during the trading period. The
value change is accumulated throughout the trading period and fixed at the contracts
expiry date to be paid in instalments in the delivery period.

Example, continued
- Daily closing price on 10

Mar 2010 ENOQ2-10 EUR 46.75
- Daily closing price on 11

Mar 2010 ENOQ2-10 EUR 48.08
[(Daily closing price t) minus (Daily closing price t-1)] x contract size
7
x hours in the
delivery period = Forward contracts Expiry Market Settlement

Forward Expiry Market Settlement on 11 Mar. 2010 = (48.08 - 46.75) x -20MW x 2184 h =
EUR -58 094.4

No cash settlement is conducted as long as the contract is in its trading period, though the
members negative Forward Expiry Market Settlement (unrealised loss) is included in the
collateral requirement (Group Risk; variation margin). Positive Forward Expiry Market
Settlement (unrealised profit) reduces Group Risk.

On the day of the trade, Forward Expiry Market Settlement is calculated in the same way as
for Futures.

Realisation of Forward expiry market settlement (delivery period)
The accumulated Forward Expiry Market Settlement, settlement that has been calculated in
the trading period will be realised through financial settlement fixed at expiry date to be
paid in instalments in the delivery period.

Example, continued:
- On 31
st
Mar. 2010 Accumulated Forward Expiry Market Settlement ENOQ2-10 EUR
205296

The daily amount to be realised = accumulated Forward Expiry Market Settlement divided
by number of delivery hours in the period multiplied by the number of hours in a day.

Realised Forward expiry market settlement on 1 Apr. 2010 = (205296/2184 h) x 24 h =
EUR 2256

Exercising Options
European-style Options are Options that can only be exercised on their expiration date.
NOMXC automatically exercises European-style Options on their expiration date, provided
certain criteria have been met. The exercise date for European-style Options will be the
third Thursday of the month before the first delivery period of the underlying contract.
Members can deny automatic exercise and may manually exercise European-style Options
that are not automatically exercised.

Settlement of an exercised Option entails delivery of the underlying contract series at its
strike price on the delivery date. Exercised Options are netted to one delivery transaction
for the underlying contract series.




7 with sign


23
Options premium
On the first trading day following the transaction of the Options contracts, the buyer is
debited and the seller is credited for the premium settlement.

Example, continued:
- Sold European-style call Option 10 MW ENOCQ30JUN0-30
Option premium: EUR 14.62 per MWh

Premium settlement 11 Mar. 2010 = 14,62 x 10 MW x 2208 h = EUR 322 810


Total cash settlement (trading period)

On 11
th
of March 2010, the member receives cash settlement which consists of the following
components: futures expiry market settlement and options premium settlement.

Example, continued:

- On 11
th
Mar. 2010 total cash settlement for the portfolio= 322 810+4410= EUR 327 220











24
5. Appendix 2, Risk Report
Please note that this is just an example of the structure of the risk report. The numbers are
therefore not accurate!

Forwards



Series Risk
Group
Position Contract
Size
Volume Closing
Price
Risk
Interval
/ Comp
Delta
(options)
Variation
Margin
Inital
Margin
Pre Netting
Netted
Initial
Margin
Daily
Margin Call
ENOMMAR
-10
ENO
Base
941,00 239 224 899 51,61 12,90 -9 911 684 -2 901 197 -2 901 197 -12 812 881
ENOMAPR-
10
ENO
Base
200,00 720 144 000 47,00 10,65 7 344 202 -1 533 600 -1 533 600 5 810 602
ENOQ2-10 ENO
Base
-235,00 2 184 -513 240 44,68 9,25 -6 129 767 -4 747 470 1 180 155 -4 949 612
ENOQ1-11 ENO
Base
970,00 2 159 2 094 230 48,00 4,84 -7 438 338 -10 136 073 -7 519 628 -14 957 966
ENOQ2-11 ENO
Base
-199,00 2 184 -434 616 38,85 3,50 354 420 -1 521 156 1 012 655 1 367 075
ENOQ1-12 ENO
Base
-327,00 2 183 -713 841 43,45 3,48 550 662 -2 484 167 1 656 111 2 206 773
ENOQ4-12 ENO
Base
-1,00 2 209 -2 209 42,95 3,44 1 215 -7 599 5 059 6 274
ENOYR-11 ENO
Base
79,00 8 760 692 040 41,00 3,74 453 593 -2 588 230 -1 340 559 -886 966
ENOYR-12 ENO
Base
0,00 8 784 0 39,80 3,18 -77 299 0 0 -77 299

Options

Series Risk
Group
Position Contract
Size
Volume Closing
Price
Comp
Delta
Variation
Margin
Inital Margin
Pre Netting
Netted
Initial
Margin
Daily Margin
Call
ENOPQ30JUN
0-38
ENO
Base
-100,00 2 208 220 800 2,60 -0,36 -574 080 -802 829 225 216 -348 864
ENOC33YR-
11
ENO
Base
25,00 8 760 219 000 7,19 0,74 1 574 610 -578 160 672 330 2 246 940
ENOC40YR-
11
ENO
Base
-25,00 8 760 -219 000 3,41 0,49 -746 790 -521 220 -521 220 -1 268 010
ENOC45YR-
11
ENO
Base
-50,00 8 760 -438 000 1,91 0,32 -836 580 -788 400 -788 400 -1 624 980
ENOP30YR-
11
ENO
Base
60,00 8 760 -525 600 0,78 -0,13 409 968 -236 520 -99 864 310 104
ENOP33YR-
11
ENO
Base
15,00 8 760 -131 400 1,50 -0,22 197 100 -99 864 -48 618 148 482
ENOP35YR-
11
ENO
Base
-75,00 8 760 657 000 2,17 -0,29 -1 425 690 -1 064 340 348 210 -1 077 480
ENOP36YR-
11
ENO
Base
-50,00 8 760 438 000 2,56 -0,33 -1 121 280 -766 500 275 940 -845 340






25
Margin and Collateral Summary (CRA report 7)



EUR

Variation Margin ENO Base 45 303 667

CfD-Helsinki 5 247 549

CfD-Stockholm 4 438 306

EDE Base 180 692

CO2 59 350

Sum 55 229 564

Netted Initial Margin ENO Base -244 722 966

CfD-Helsinki -12 662 237

CfD-Stockholm -10 081 574

EDE Base -143 934

CO2 -602 955

Sum -268 213 666

Daily Margin Call ENO Base -199 419 299

CfD-Helsinki -7 414 688

CfD-Stockholm -5 643 268

EDE Base 36 758

CO2 -543 605

Sum -212 984 102

Base Collateral Sum -700 000

Collateral Call Sum -213 684 102

Bank Balance Sum 4 600 930

Guarantee Sum 436 000 000

Security Deposition Sum 0

Guarantee Usage Sum 213 265 842

Security Usage Sum 0

Cash Margin Sum -418 260

Total Cash Settlement Sum 623 191

Total Required Bank Balance Sum 0

Surplus / Deficit Security Sum 0

Surplus / Deficit Guarantee Sum 222 734 158

Surplus / Deficit Bank Balance Sum 4 805 861





26
6. Appendix 3, RNP

Assume the following position end of trading day t:

Position day t
Product Hours Position Volume Purchase price Closing price Variation Margin
ENOYR-09 8760 -2 -17520 50,4 36,8 237396,0
ENOQ1-09 2159 8 17272 55,5 43,8 -202082,4
ENOQ2-09 2184 5 10920 47,8 32,8 -164127,6
ENOQ3-09 2208 3 6624 46,3 38,8 -49348,8
ENOQ4-09 2209 4 8836 51,7 31,6 -177868,7
Net

-356031,5



Synthetic closing price YR-09 36,72


The synthetic closing is an hour-weighted closing for the year-09 based on the closing prices
for the underlying season contracts covering the same delivery period.

The variation margin for ENOYR-09 can be divided into the underlying delivery periods, and
the above position can be shown as follows:

Split of the ENOYR-09 into seasons
MW Hours MWh
Variation
Margin
ENOYR-09 -2 2159 -4318 58508,9
ENOQ1-09 8 2159 17272 -202082,4
Net Q1

-143573,5



ENOYR-09 -2 2184 -4368 59186,4
ENOQ2-09 5 2184 10920 -164127,6
Net Q2

-104941,2



ENOYR-09 -2 2208 -4416 59836,8
ENOQ3-09 3 2208 6624 -49348,8
Net Q3

10488,0



ENOYR-09 -2 2209 -4418 59863,9
ENOQ4-09 4 2209 8836 -177868,7
Net Q4 -118004,8
Net (a) -356031,5


According to the rules for creating a RNP, the contract on side1 will in this example be
ENOYR-09 and the contracts on side2 will be the season contracts. The following RNP
position is created:









27


RNP day t
MW Hours MWh Variation Margin
ENOYR-09 -2 2159 -4318 28282,9
ENOQ1-09 2 2159 4318 -50520,6
Net Q1

-22237,7



ENOYR-09 -2 2184 -4368 76658,4
ENOQ2-09 2 2184 4368 -65651,0
Net Q2

11007,4



ENOYR-09 -2 2208 -4416 51004,8
ENOQ3-09 2 2208 4416 -32899,2
Net Q3

18105,6



ENOYR-09 -2 2209 -4418 82837,5
ENOQ4-09 2 2209 4418 -88934,3
Net Q4 -6096,8
Net (b) 778,4

The net variation margin for the RNP is EUR 778.4 where the clearing member pays out EUR
50520.6 during the Q1 delivery period. Variation margin is fixed as long as the RNP is not
altered. The clearing member will have to place collateral to cover the negative variation
margin, but the initial margin on the RNP will be zero.

The rest position for the clearing member is as follows:

Rest Position day t
MW Hours MWh Variation Margin
ENOYR-09 0 2159 0 0
ENOQ1-09 6 2159 12954 -151561,8

ENOYR-09 0 2184 0 0
ENOQ2-09 3 2184 6552 -98476,6

ENOYR-09 0 2208 0 0
ENOQ3-09 1 2208 2208 -16449,6



ENOYR-09 0 2209 0 0
ENOQ4-09 2 2209 4418 -88934,3
Net (c) -355422,3

The position in every contract will be reduced with the same amount of MW used in the
RNP, giving the rest position, the same goes for the variation margin.

The net variation margin (b+c) is EUR -354643.9 which is EUR 1387.6 lower than the initial
variation margin of EUR -356031.5. The difference can be explained by that when creating
the RNP, the year contract is switched into the season contracts at a synthetic price (EUR
36.72) and not the years closing price (EUR 36.8). The difference between the prices is a
gain or a loss, in this example a loss, which is locked in when creating the RNP. The loss
is calculated the following way: (36.72-38.5)*8760*-2 = 1387.6

.


28
Net VM (b+c) -354643.9
+Loss on difference -1387.6
Initial VM (a) -356031.5









29
7. Appendix 4, Cash Margin

Three examples on how the cash margin is calculated for Futures in delivery.
Common for all examples:
Position: +10 MW
Hours: 24
(FCP): EUR 63.4
(T) is a trading (and clearing) day.
(x) is not a trading day but a calendar day between trading day (T-1) and (T).
(y) is not a trading day but a calendar day between trading day (T) and (T+1).
(x) and (y) never represent a Saturday, Sunday or a public holiday.


Cash margin for ordinary trading days (except for Mondays and Fridays):
Monday 08.3. (T-1)
Tuesday 09.3. (T)
Wednesday 10.3 (T+1)
Thursday 11.3 (T+2)

The cash margin, which will be equal to SRCS is calculated on (T-1) and included in the
daily margin call on (T). When SRCS for trading day (T) is debited/credited on trading day
(T+1), the cash margin equals the settlement amount.

Cash margin for (T) calculated on (T-1):
SRP_T (determined on T-1): EUR 60.31

MW * Hours * (SRP FCP)
10 * 24 * (60.31 63.4) = -741.6

The cash margin (EUR -741.6) will be a part of the daily margin call on (T) and equals
trading day Ts SRCS which is debited/credited the bank account on (T+1).

Cash margin for weekends (including Fridays):
Thursday 11.3 (T-1)
Friday 12.3 (T)
Saturday 13.3 (y)
Sunday 14.3 (y+1)
Monday 15.3 (T+1)

The cash margin for the weekend (T, y and y+1) is calculated on (T-1) and it will be a part
of the daily margin call on (T), since SRCS for the weekend is debited/credited the bank
account on (T+1).

On (T-1), SRP for Saturday (SRP_y) and Sunday (SRP_y+1) is unknown, but NOMXC
estimates the worst-case SRP for (y) and (y+1). The estimation is based on the SRP for
Friday (SRP_T), which is known at (T-1).

Estimation of worst-case SRP for y and y+1:

Assume that SRP_T = EUR 55.64

Scanning Range SRP: 30%
ScanningRangeSRP equals the maximum risk interval (price change) for electricity contracts
in delivery, calculated in SPAN

. The figure is what NOMXC reasonably expects the price

30
movement to be the next day, meaning that NOMXC expects that SRP_T can increase or
decrease by 30%.

Holiday adjustment factor: 10%
Observations of the SRP show that the SRP will most likely decrease between a trading day
and a holiday (e.g. between Friday and Saturday/Sunday). The holiday adjustment factor is
calculated based on an average of such observations and is used to adjust the SRP to get
the best feasible estimate of SRP for holidays.

Estimation of worst-case SRP for (y) and (y+1) is calculated based on the following four
steps:

Step 1: Estimate the worst-case change in SRP_y:
SRP_T * (1 - Holiday adjustment factor) * ScanningRangeSRP * Sqrt(1),
55.64 * (1- 0,1) * 30% * sqrt(1) = 15,02

Step 2: Estimate the worst-case change in SRP_y+1:
SRP_T * (1 - Holiday adjustment factor) * ScanningRangeSRP * Sqrt(2),
55.64 * (1- 0,1) * 30% * sqrt(2) = 21.18
NOMXC calculates with the sqrt(2) since there is greater uncertainty about the Sundays
spot price

NOTE! When estimating the worst-case change, NOMXC will not use a higher value then
sqrt(2) in the equation, i.e. sqrt(3) etc.

Step 3: Estimate the worst-case SRP_y:
SRP_T * (1 - Holiday adjustment factor) -/+ worst-case change for SRP_y,
55.64 * (1 - 0,1) -/+ 15,02 = 35.06 / 65.1
The worst-case SRP_y for this long position is EUR 35.06.

Step 4: Estimate the worst-case SRP_y+1:
SRP_T * (1 - Holiday adjustment factor) -/+ worst-case change for SRP_y+1,
55.64 * (1 - 0,1) -/+ 21.18 = 28.9 / 71.26
The worst-case SRP_y+1 for this long position is EUR 28.9

Cash margin for weekends (T, y and y+1) calculated on T-1, with a cover margin of 33%

The cover margin is a fixed margin of estimated SRCS.

Calculation of the weekend cash margin is based on the following four steps:

Step 1: Fridays (T) part of the weekend cash margin:
10 * 24 * (55.64 63.4) = -1862.4 (as calculated on ordinary trading days).

Step 2: Estimate Saturdays (y) part of the weekend cash margin:
MW * hours * (estimated worst-case SRP_y FCP) * cover margin,
10 * 24 * (35.06 63.4) * 0,33 = -2244.5

Step 3: Estimate Sundays (y+1) part of the weekend cash margin:
MW * hours * (estimated worst-case SRP_y+1 FCP) * cover margin,
10 * 24 * (28.9 63.4) * 0,33 = -2732.4

Step 4: Cash margin for weekends:
Fridays cash margin + estimated cash margin for Saturday and Sunday,
-1862.4 + -2244.5 + -2732.4 = -6839.3


31
A cash margin of EUR -6839.3 is calculated on (T-1) (Thursday) and included as a part of
the daily margin call on (T) (Friday) to cover the cash settlement on (T+1) (Monday).

Cash margin for Mondays:
Friday 12.3 (T-1)
Saturday 13.3 (x)
Sunday 14.3 (x+1)
Monday 15.3 (T)
Tuesday 16.3 (T+1)

The cash margin for Mondays is calculated in the same way as for an ordinary trading day
(see first example above) but the calculation is done on Sunday (y+1) and the cash margin
for Monday (T) will be a part of the daily margin call on (T).

Cash margin in connection with public holidays:
Tuesday 4.5 (T-1)
Wednesday 5.5 (T)
Thursday 6.5 (y)
Friday 7.5 (T+1)
Saturday 8.5 (y+1)
Sunday 9.5 (y+2)
Monday 10.5 (T+2)

The cash margin for the trading day (T) and the public holiday (y) is calculated on (T-1). It
will be a part of the daily margin call on (T), since SRCS for (T) and (y) is debited/credited
the bank account on (T+1). On (T-1), SRP for Thursday (SRP_y) is not known and NOMXC
estimates the worst-case SRP for public holiday (y). The estimation is based on the SRP for
Wednesday (SRP_T), which is known on (T-1). The calculation is done in the same manner
as for calculating the cash margin for weekends.

Estimation of worst-case SRP for(y):
Assume that SRP_T = EUR 55.92

Scanning Range SRP: 30% (see explanation above).
Holiday adjustment factor: 10% (see explanation above).

Estimation of worst-case SRP for y is calculated based on the following two steps:

Step 1: Estimate the worst-case change in SRP_y:
SRP_T * (1 Holiday adjustment factor) * ScanningRangeSRP * Sqrt(1),
55.92 * (1 0,1) * 30% * sqrt(1) = 15.1

Step 2: Estimate the worst-case SRP_y:
SRP_T * (1 Holiday adjustment factor) -/+ worst-case change,
55.92 * (1 0,1) -/+ 15,1 = 35.23 / 65.43
The worst-case SRP_y for the long position is EUR 65.43

Cash margin in connection with public holidays (T and y) which is calculated on (T-1):
Cover margin: 33%

Calculation of the cash margin is based on the following three steps:

Step 1: Wednesdays (T) part of the cash margin:
10 * 24 * (55.92 63.4) = -1795.2 (as calculated on ordinary trading days).



32
Step 2: Estimate Thursdays (y) part of the cash margin:
MW * hours * (estimated worst-case SRP_y FCP) * cover margin,
10 * 24 * (35.23 63.4) * 0,33 = -2231

Step 3: Cash margin in connection with public holidays:
Wednesdays cash margin + estimated cash margin for Thursday,
-1795.2+ -2231 = -4026.2

A cash margin of EUR -4026.2 is calculated on T-1 (Tuesday) and included as a part of the
daily margin call on T (Wednesday) to cover the cash settlement on T+1 (Friday).

The cash margin for the weekend is calculated as described above, but the calculation will
take place on y and the margin will be a part of the daily margin call on T+1.

Special circumstances
Appears when the first day of the settlement is a weekend or a public holiday, for instance:

Wednesday 15.5 (T-1)
Thursday 16.5 (T)
Friday 17.5 (y)
Saturday 18.5 (y+1)
Sunday 19.5 (y+2)
Monday 20.5 (y+3)
Tuesday 21.5 (T+1)

The cash margin for Monday (y+3) is calculated on Wednesday (T-1) and will be a part of
the margin call on Thursday (T), since settlement for (y+3) is debited/credited the bank
account on (T+1).

When calculating the cash margin on (T-1) the FCP is not yet known (FCP is fixed on T) and
the FCP must also be estimated. NOMXC uses the contracts calculated worst-case closing
price.

These special circumstances can occur for 24-hour contracts and in connection with the
Easter Monday and Whit Monday, and sometimes in connection with Christmas holidays,
New Year, Labour Day, Norways Constitution Day and other public holidays when the
financial market is closed.

Forwards with a Spot Reference Cash Settlement
The cash margin for Forwards with a Spot Reference Cash Settlement is calculated in the
same way as for Futures with a Spot Reference Cash Settlement. The only difference is that
the cash margin is adjusted for the realized instalment in connection with the expiry market
settlement for the Forward.

Example 1:
Calculated cash margin: EUR 10 000
Instalment expiry market settlement: EUR +4500
Final cash margin: EUR 5500

Example 2:
Calculated cash margin: EUR 10 000
Instalment expiry market settlement: EUR -4500
Final cash margin: EUR 14500




33

Example 3:
Calculated cash margin: EUR 10 000
Instalment expiry market settlement: EUR +15 000
Final cash margin: EUR +5000

Net cash margin for Futures and Forwards
When the cash margin for Futures and Forwards is calculated, the cash margins are netted
to reflect a net cash margin for all the derivatives. This implies that a positive cash margin
for Futures reduces a negative cash margin for Forwards, or the other way around. If the
sum of the net cash margins is positive, there will not be any cash margin for the
contracts in question.

Example 1:
Cash margin Futures with a daily market settlement: EUR 10 000
Cash margin Futures with a Spot Reference Cash Settlement: EUR 15 000
Cash margin Forwards with a Spot Reference Cash Settlement: EUR 5000

Net cash margin: EUR 30 000

Example 2:
Cash margin Futures with a daily market settlement: EUR 10 000
Cash margin Futures with a Spot Reference Cash Settlement: EUR 15 000
Cash margin Forwards with a Spot Reference Cash Settlement: EUR +5000

Net cash margin: EUR 20000

Example 3:
Cash margin Futures with a daily market settlement: EUR 10 000
Cash margin Futures with a Spot Reference Cash Settlement: EUR +9000
Cash margin Forwards with a Spot Reference Cash Settlement: EUR +5000

Net cash margin: EUR 0






34
8. Appendix 5, Pricing options using delivery to
strike

Options at Nord Pool are settled according to delivery to strike (dts). Under this method,
the option profit/loss will not be realized until the underlying forward is delivered.
The option premium is calculated by using an extra discounting expression for the
commonly used Black76 approach. This adjusted pricing is used for calculation of closing
prices and margin setting by Nord Pool.

To adjust pricing of call or put options for dts, one must calculate the option using Black76
as if it were cash-settled, then discount the price using the forward rate r
f
and the time
between exercise and the start of delivery T
f
.

In other words:

cash
T r
dts
cash
T r
dts
p e p
c e c
f f
f f

=
=



365 2
d t t
T
s d
f
+

=

where ts and td are the start and end of the delivery period in years, respectively, and d is
the number of days between exercise and start of delivery.

In the delivery to strike (dts) method the holder of a call (put) option who chooses to
exercise will receive a long (short) underlying forward contract at the options exercise
price. The option writer will be registered with the opposite position. Thus the profit/loss
remains unrealised until the forward is delivered, either as an open or closed position.

To estimate the correct discount factor to use for discounting dts options, we express it as
an average of discount factors,

=
=

d
s
f
t T
t T
T r
s d
e
t t
1


where t
s
and t
d
are the start and end of the delivery period in years, respectively, and r
f
is a
new interest parameter (the forward rate between option exercise and delivery). But this
would quickly become cumbersome for calculation algorithms. Instead, we make the
additional assumption that this can be estimated using a continuous time interval. (The
function is not actually continuous, so this will only get us closer to the precise sum, not
equal it). When we estimate the discount factor using the integral


}

d
d
f
t
t
T r
s d
dT e
t t
1



When solving this ordinary Riemann integral with respect to T
f
one arrives at


35

( ) ( ) | |
d f s f
t r t r
s d
f
f
e e t t r
r
T

+ = ln ln ln
1


If ts = 0, this halfway point will be slightly less than 0.5 in realistic interest rates (0% -
10%).

Using


365 2
d t t
T
s d
f
+

=

where d is the number of days between exercise and delivery is a good estimation.