Nodal – Weighting Factors for CRR Future Credit Exposure - PowerPoint PPT Presentation

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Nodal – Weighting Factors for CRR Future Credit Exposure

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  1. Nodal – Weighting Factors for CRR Future Credit Exposure Credit Work Group

  2. CRR mark to market valuations • Forward Mark to Market exposure for all CRRs owned where price is determined based on a weighted average of 1) Auction clearing price 2) Today’s most recent value 3) Most recent five day’s average value 4) Previous month’s value e.g. for PTP Obligations: FMMOBLo = (W1*ACP h, (j,k) + W2 * TOBLV h, (j,k) + W3 * FDOBLV h, (j,k) + W4 * PMOBLV h, (j,k) ) * OBLMWo, h, (j,k) Credit Work Group

  3. Weighting factors • There are four components for each CRR Product – W1, W2, W3, and W4 • The sum of weighting factors must equal to 1 • Weighting factors may vary by type of CRR (PTP Options, PTP Obligation, Flow Gate Rights) • Weighting factors may vary by month • Weighting factors must be approved by CWG • Initial weighting factors for use in valuations at Nodal go-live to be based on assumptions agreed to by CWG • On going determination after Nodal go-live to be done periodically (quarterly/annually) based on historical data Credit Work Group

  4. Proposal for initial weighting factors For example: Current month - January in January CM + 1 - February in January CM+ 2 - March through xx in January Credit Work Group

  5. Proposal for on going determination of weighting factors • At the end of auction, Auction Clearing Price (ACP) is assumed to be an indicator of forward value of CRR • After the auction, the variability in the historical CRR pay-off is a possible indicator of forward value of CRR • Monthly trend, five day trend and latest price available provide information on the historical variability of the CRR pay-off • Are historical pay-off for all CRRs of given type (i.e. pay off for all CRR Options or CRR Obligations) normally distributed? • The mean and standard deviation provide information on expected value and variability (a.k.a. volatility) of the distribution • Periodically, for each CRR type, determine the (a) Monthly average of all CRR of given type in the previous ‘x’ months (b) Rolling 5 day average of all CRR of given type in the previous ‘x’ months (c ) Daily average of all CRR of given type in the previous ‘x’ months. • From the analysis, determine the probability measure that the CRR pay-off would be less than or equal to the ACP in (a) monthly trend (b) five day trend and (c) daily trend • Convert the probability measure to weighting factor by normalizing these probability values (each probability measure divided by total sum of probability measures) Credit Work Group