Collateral Margins are the main component of the clearing guarantee system for forward markets. They are contributed by Clearing House Members and their purpose is to secure the risk related to the forward transactions cleared by each Member. They are calculated daily for each Clearing House Member after the end of the session.
Collateral Margins consist of two components: the Initial Margin and the Variation Margin. When calculating the required value of the Collateral Margin, IRGiT considers the possible netting of the Initial Margin and the Variation Margin.
Detailed information on the methodology for calculating Collateral Margins is described in the Detailed Clearing and Settlement Rules of the Exchange Clearing House.
Initial Margin
The purpose of the Initial Margin is to cover changes in the valuation of the portfolio of positions of a Clearing House Member in the period from the most recent replenishment of collateral margin until closing, assuming normal market conditions. Initial Margin is calculated for netted positions in delivery during the period, on the basis of the following information:
- position balance expressed in MWh
- current clearing price
- risk parameters
The required value of the Initial Margin is always equal or greater than 0. Risk parameters for individual contract types cleared by IRGiT are calculated with the confidence level of at least 99%. The current value of risk parameters is published in the parameters tab.
Cross-product netting of initial margins
Cross-product netting of initial margins refers to the method of calculating initial margins for BASE, PEAK and OFFPEAK contracts held in the portfolio of a given Clearing House Member. This type of netting assumes adaptation of the level of requirements regarding the initial margin to the risk generated by the positions of Clearing House Members, taking into account opposite positions in concluded electricity delivery contracts with different profiles.
The mechanism additionally aims to eliminate the difference between the initial margin assigned to the position in the BASE contract and the margin assigned to the equivalent of such position in PEAK and OFFPEAK contracts. The solution allows for its netting up to as much as 100%.
Cross-period netting of initial margins
Cross-period netting of initial margins refers to the method of calculating initial margins for opposite positions in different delivery periods within a single profile, held in the portfolio of a given Clearing House Member or a Power Group, for BASE, PEAK, OFFPEAK and GAS_BASE type contracts.
Cross-period netting is divided into intra-delivery-group cross-period netting, which adjusts the level of required initial margin to the risk generated by positions of Clearing House Member in delivery periods classified in the same delivery group, and into inter-delivery-group cross-period netting, which nets the value of the required initial margins for positions classified in different delivery groups.
The maximum level of reduction of the required initial margins depends on the level of intra-delivery-group correlation parameters, inter-delivery-group correlation parameters, cross-period netting recognition parameter, and delivery groups inclusion parameters, which are published in the parameters tab.
Netting of initial margins – order of application
Initial margins are netted in the following order:
- Cross-product netting at the Clearing House Member level.
- Group netting (if applicable).
- Cross-product netting at the Power Group level (if applicable).
- Intra-delivery-group cross-period netting at the Clearing House Member/Power Group level.
- Inter-delivery-group cross-period netting at the Clearing House Member/Power Group level.
Partial results of each of the above netting components are included in the clearing system in the “Initial margin - Position netting offsets” report.
Variation Margin
Variation Margin is designed to mark the portfolio value to market on an ongoing basis. It is calculated on the basis of the following information:
- current clearing price
- volume in buy transactions and average weighted buy prices
- volume in sell transactions and average weighted sell prices
Depending on the current market conditions and the prices at which a Member concluded transactions, a Variation Margin may be either positive (surplus) or negative (requirement).