Feature Comparison

Efficient Margining Practices

While NOCC’s margining practices provide the same level of protection and security as most standard traded futures markets, NOCC’s model is specially designed to accommodate the unique requirements and risks in physical energy markets.

NOCC provides many advantages over other cleared markets and bilateral market practices for physical energy by bridging the interests of both physical and financial market participants.

Straight-through Netting

NOCC requires both original and variation margin on forward positions-- as is standard in cleared commodity markets. In physical energy markets, however, the biggest risks, and collateral requirements, lie in the notional value of energy delivered.

Under standard futures contracts, both buyers and sellers are usually required to post full security with their Futures Commission Merchants (FCMs) to cover the notional value of their delivery position, in advance of delivery. (Notional value in delivery is many times larger than mark-to-market price variation in a forward contract).

Buyers and Sellers Deal Directly with NOCC

NOCC acts as a ‘riskless principal’ whereby buyers and sellers deal directly with NOCC and not through Futures Commission Merchants (FCMs). Since NOCC holds title to delivered energy, and the right to receive title, we can liquidate an underlying contract in the instance of a buyer or seller default.

Our margining practices are therefore more streamlined (and transparent) than those employed by FCMs transacting in futures contracts-- and sellers’ delivered position (seller receivables) offset other collateral requirements on other positions held with NOCC.

The NOCC approach provides the benefits of reduced overall collateral requirements and increased efficiency of risk capital.

Flexible Forms of Security

NOCC allows participants to post letters of credit from approved banks-- unlike most of the FCMs. For many trade participants, letters of credit are less costly than the opportunity cost of cash. NOCC also has arrangements in place to assist customers with other means to secure low cost financing and or insurance products to meet their security requirements.

Most significantly, sellers' Accounts Receivable act as a form of security that offsets other margin requirements.

Reduced Buyer Delivery Margin Requirements

Since NOCC holds title, its delivery margin (based on notional value) is collected from buyers as a position goes into delivery, rather than in advance. This practice reduces the average cost of collateral to buyers by about 45% vis-à-vis FCM upfront cash requirements and common bilateral practices.

Legal Protections for Netted Positions

Much of the value provided through by NOCC is predicated on the ability to offset collateral requirements between positions in spot contracts backed by CFCs™ and forward contracts.

The CFC™ is a forward contract and thus is eligible for certain protections under the Bankruptcy Code that are not available to spot transactions. NOCC’s CFCs™ thus provide a mechanism to hold security that mirrors receivables in underlying spot contracts, yet with the bankruptcy protection afforded to forward contracts.