| |
|
 |
 |
Glossary
| AA |
Adequate Assurance |
| Cash |
Hard currency that can be posted as collateral. ISDA, Collateral Survey 2000 |
| CELA |
Credit Event Liquidity Adequacy |
| Closeout Setoff Rights |
The right to net other amounts owed by the two parties to each other after calculation of the closeout amount on the early termination date. Committee of Chief Risk Officers, Glossary, Vol. 6 of 6 (Washington, CCRO: 19 November 2002) |
| Counterparty Performance Risk |
Potential adverse occurrence of a counterparty's ability to operationally perform on an agreement or obligation. CCRO, Glossary 2002 |
| Collateral |
A means of reducing credit exposure to a counterparty. Under a collateralization arrangement, a party who owes an obligation to another party posts collateral–typically consisting of cash or securities–to secure the obligation. In the event that the party defaults on the obligation, the secured party may seize the collateral. Collateral is sometimes called 'margin.' Holton 2002 |
| Collateral Threshold |
An amount of unsecured credit specified in the contract above which the counterparty must post collateral. Haynie, Glossary 2002 |
| Contract |
A bi-lateral agreement between a buyer and seller of a commodity transaction, also known as a Master Agreement or a Trading Partner Agreement. Haynie, Glossary 2002 |
| Contract General Terms & Conditions |
Legal pre-arrangement excluding particulars of a commodity transaction. Haynie, Glossary 2002 |
| Contract Commercial Terms |
Specifics of a commodity transaction as defined in an addendum, exhibit, or annex to a contract. Specifics include price, term, volume, delivery location. Haynie, Glossary 2002 |
| Counterparty |
Each party to a financial derivative transaction. |
| Credit Exposure |
A numerical measure of credit risk. |
| Credit Risk |
Potential adverse occurrence of a counterparty's ability to pay its obligations. CCRO, Glossary 2002 |
| Credit Value at Risk (CVaR) |
The largest likely loss expected to be suffered due to a counterparty default over a given period of time with a given probability. CCRO, Glossary 2002 |
| Current Exposure |
Credit exposure that includes both billed and unbilled receivables for a product that has already been delivered, as well as MtM exposure for products yet to be delivered. CCRO, Glossary 2002 |
| Exposure |
The condition of being subjected to a source of risk. CCRO, Glossary 2002 |
| Exposure Threshold |
An internally defined amount of exposure that is based on the contractual limits defined in the Master Agreement. Haynie, Glossary 2002 |
| Forward Price Curve |
A graphical depiction of the future value of one commodity and one location over time. CCRO, Glossary 2002 |
| Guarantee |
A pledge from a third party company to back the financial obligations of a counterparty. In the event that the counterparty defaults on its obligations, the creditor company has the right to collect payment from the guarantor. Miri, CreditLimits™ 2002
Guarantees are not typically considered to be collateral instruments or performance assurances, although they have similar a effect. EEI, Collateral Annex 2002 |
| Guarantor |
A company that makes a guarantee on behalf of a counterparty. Miri, CreditLimits™ 2002 |
| GAAP |
Generally Accepted Accounting Principles; A widely accepted set of rules, conventions, standards, and procedures for reporting financial information, as established by the Financial Accounting Standards Board. |
| GARP |
Generally Accepted Risk Principles |
| Hedge |
The initiation of a position in a futures or options market that is intended as a temporary substitute for the sale or purchase of the actual commodity. CCRO, Glossary 2002 |
| High/Low Exposure |
Comparison of worst case and best case credit to limits to determine gross exposure. Neither netting nor setoff are taken into account when determining this level of credit exposure. CCRO, Glossary 2002 |
Letter of Credit
(LoC or LC) |
An irrevocable, transferable standby letter of credit issued by a U.S. commercial bank or a foreign bank with a U.S. branch with such bank having a credit rating of A- from S&P or A3 from Moody's, in a form acceptable to the party in whose favor the letter of credit is issued. EEI, Master Power Purchase & Sale Agreement 2002 |
| Liquidity |
A company's internal ability to post collateral to satisfy it's obligations with it's counterparties. CCRO, Glossary 2002
Primary Liquidity – unrestricted cash on hand and unused credit facilities
Secondary Liquidity – a company's free cash flow; cash generated from selling inventory; uncommitted credit lines |
| MAC |
Material Adverse Change |
| Margin Payment |
A payment of cash from one counterparty to another in which the cash is held as collateral in the case of counterparty default. ISDA, Collateral Survey 2000 |
| Mark-to-Market (MtM) |
The value of a financial instrument (or a portfolio of such instruments) at current market rates or prices of the underlying [commodity]. Marking transactions to market on a daily (or more frequent) basis is often recommended in risk management guidelines. CCRO, Glossary 2002 |
| Market Risk |
Potential fluctuations in prices, volumes exchanged, and market rules that may affect a company's buying and selling activities. Usually this is composed of: Price risk; Credit risk; Counterparty performance risk; and
Volumetric risk. CCRO, Glossary 2002 |
| MCELA |
Market and Credit Event Liquidity Adequacy |
| Netting |
Adding of current dollar amounts owed less current dollar amounts to be received from a counterparty. As opposed to offsetting, netting can be accomplished only via a formal legal agreement between counterparties. CCRO, Glossary 2002 |
| Master Netting Agreement |
“… bilateral contract that enables trading counterparties to agree to net collateral requirements; and, in a closeout situation, settlement amounts related to the underlying master trading contracts relating to sales and purchases of electricity, natural gas, and related financial transactions. In other words, the Master Netting Agreement offsets positive balances of one transaction with the negative balances of another." EEI, Master Netting FAQ 2002 |
| Offsetting |
Matching two financial transactions with the same delivery, time, and volume against one another to reduce financial obligation. As opposed to netting, offsetting does not require a formal agreement. CCRO, Glossary 2002 |
| Performance Assurance |
Collateral in the form of either cash, letter of credit, or other security acceptable to the requesting party. EEI, Master Power Purchase & Sale Agreement 2002 |
| Potential Exposure (Price Risk Based) |
Describes the range of values that current exposure could take over a given time horizon as a result of price and/or volumetric uncertainty. CCRO, Glossary 2002 |
| Price Risk |
Potential fluctuations in prices of the underlying energy commodity. CCRO, Glossary 2002 |
| Rating Trigger |
Any number of contractual clauses that call some change in the counterparty relationship given a change in the debt ratings. Ratings triggers often call for decreased unsecured credit limits. CCRO, Glossary 2002 |
| Settlement Amount |
“With respect to a Transaction and the Non-Defaulting Party, the Losses and Gains, and Costs, … which such a party incurs as a result of the liquidation of a Terminated Transaction." EEI, Master Power Purchase & Sale Agreement 2002 |
| Valuation Percentage |
A percentage that reflects the relative quality of a certain type of collateral. To calculate the posted value of the collateral, the face value (or fair market value) of the collateral is multiplied by the valuation percentage. Companies thus use a valuation percentage to “discount” the face value of the actual collateral pledged. Cash and letters of credit normally have a 100% valuation percentage, but corporate bonds and physical assets usually have valuation percentages less than 100% to reflect the fact that they are not considered to be as effective forms of collateral as cash. EEI, Collateral Annex 2002
Face value minus the haircut equals the posted value of the collateral |
| Value at Risk (VaR) |
Value at risk of a position or a portfolio is defined as the loss or change in value that is not expected to be exceeded with a given degree of confidence over a time period of interest called the holding period. VaR is therefore a statistical measure of variability in the value of a portfolio of positions or earnings from economic activity arising from the changes in the market prices of the commodities or other variables underlying the portfolio or activity. There are two parameters attached to any given VaR estimate, namely, the degree of confidence or confidence level and the holding period. The confidence level is associated with probability that is sought to be assigned to the range of outcomes, and the holding period is the time interval over which the market prices or other drivers undergo changes from the current levels and thereby affect the value currently placed on the portfolio. The change in VaR by adding a new position is commonly referred to as delta VaR. CCRO, Glossary 2002 |
| Volumetric Risk |
The risk that commodity volumes will vary from expected volumes and result in a potential loss due to changing commodity market prices. For example, a generating unit sells projected electric generation production forward and at the time of delivery a unit if forced out and cannot deliver. This results in a loss if the process to purchase electricity to cover the sales is higher than the electricity sales price. CCRO, Glossary 2002 |
|
|
