MCWG Update to WMS

1. MCWG Update to WMS 2/13/2013

2. MCWG Update to WMS • General Update • January 30 Joint MCWG/CWG Meeting • NPRR 509 – Shortened RTM Settlement Timeline Comments • MCWG members believe that shortening the settlement timeline will generally have positive impacts on credit risk by reducing the number of days of outstanding payments due to from the market. • Potentially offsetting the positive impacts are concerns regarding the accuracy of meter data available in such a short time following the date of flow. If shortening the settlement timeline leads to more profiling and less accurate data then it could result in increased risk to the market. • MCWG supports COPS phased approach to implementation which would allow ERCOT and market participants to assess the impact of shortening the settlement cycle on the ability to submit and process accurate data. • Nominations for Chair and Vice Chair were submitted to ERCOT. Votes are due by Friday, February 15 and the results will be presented to WMS at the March meeting for confirmation.

3. MCWG Update to WMS • Letter of Credit Concentration Subgroup • The group met on January 22nd and February 12th • Participants attempted to clearly define and quantify the risks posed by excessive letter of credit exposures. • The primary risk is that a bank fails to honor one or more letters of credit which results in an uplift to the market. • A bank failure would not necessarily result in a default by a CounterParty using a Letter of Credit issued by the failing bank. • Quantifying the risk is not feasible given the number of variables involved. • The group requested sample data from ERCOT to get a better understanding of historical exposures.

4. MCWG Update to WMS • Letter of Credit Concentration Subgroup (Continued) • Sample Data

5. MCWG Update to WMS • Letter of Credit Concentration Subgroup (Continued) • Current ERCOT Proposal • Establish a $200 million limit on letters of credit per Counter-Party per Financial Institution. • Benefits: • A limit per Counter-Party would effectively limit the exposure due to an individual CounterPartyDefault and subsequent Letter of Credit default by the issuer. • Having a defined limit by CounterParty would allow each CounterParty to manage their collateral constraints without other CounterParties’ activities impacting their ability to post. • Risks: • An extreme market event which results in an unforeseen increase in credit requirements could result in a CounterParty with adequate letter of credit posting ability to default if they cannot provide alternative collateral above the cap. • Establishes overall limits per Financial Institution based on credit rating and Tangible Net Worth with an absolute cap of $400 million per issuer. • Benefits: • Establishing a limit per issuer would cap the total amount of exposure the market would have to an issuer. • Requires ERCOT to notify the market if an issuer is within $10 million of the aggregate limit.

6. MCWG Update to WMS • Letter of Credit Concentration Subgroup (Continued) • Current ERCOT Proposal (Continued) • Establishes an overall limit per Financial Institution based on credit rating and Tangible Net Worth with an absolute cap of $400 million per issuer. • Benefits: • Establishing a limit per issuer would cap the total amount of exposure the market would have to an issuer. • Risks: • ERCOT would reject letters of credit issued above the cap which could result in a Counterparty with the ability to post a letter credit from a qualified issuer due to capacity being used by other Counterparties. This could potentially result in a collateral default. • Requires ERCOT to notify the market if an issuer is within $10 million of the aggregate limit. • Next Step • The matter will be further discussed at the joint MCWG/CWG meeting in February.