Dr. Jan HAIZMANN LL.M. Legal Committee Chairman, Member of the Board [email protected] Jan...

Dr. Jan HAIZMANN LL.M.

Legal Committee Chairman,

Member of the Board

[email protected]

Jan Haizmann 18 September 2012

European Federation of Energy Traders

1

Standardisation as Key Requirement for OTC Trading in Turkey & Basics of the EFET General Agreement Gas PETFORM EFET Workshop

20 May 2014, Ankara Turkey

www.efet.org

EFET Structure

EFET MembersEFET Deutschland

Members

BoardSecretariat

Membership CommitteeEFET Deutschland

Board

Legal Committee Gas CommitteeElectricity Committee

German TF Electricity (GTFE)

eCM PwG

TF CpML

TF Market Supervision

German TF Gas(GTFG)

TF EmissionsTrading

TF Iberia

TFSwitzerland

TF CEE-E

Legal OpinionReview

B.O. Group

TF VAT/Tax

TF France

IT Architecture

Payment Netting PG

Gas HubDevelopment

Info. Transp. PG

Clearing & Collateral

eSM PwG

eXRP TF

LNG PG

Capacity PG

Mrkt based balanc.

TF Hub/Gas Doc

LC TF Coal Doc.

LC TF Res

LC TF Gas Appendix

TF EU CollateralReform

LC TF CEE/SEE

TF Renewables

WG Balancing

Intraday PG

WG Capacity Allocation

eCredit Matrix TF

Credit Risk TF

Oversight Committee

Finance & Treasury

TF CEE-G

ProcessStandardisation

Committee

Secure Data Exch.

TF Dodd-Frank

WG TR

TF Italy

TF BeNe-G

TF Turkey

BPOC

Jan Haizmann Warsaw, 29th March, 2010 5

Why Contractual Standardisation?

Or how things can go wrong …

Jan Haizmann Warsaw, 29th March, 2010 6

Standardisation allows Risk Managment

Energy Traders need One Agreement across many

countries to effectively manage their legal risks

EFET Agreement offers international proven (!)

standard solution accross many jurisdictions

Insular solutions lead to delay in product

standardisation and create obstacles for market

developments

Standard products allow liquidity in trading and

pricing is based on standard conditions

Jan Haizmann Istanbul, 22 July 2011 7

Standardisation = Engine for Liquidity

8Dr. Jan Haizmann Berlin, 17.1.2012

Energy Trading = International Business

Quelle: EEX

9Dr. Jan Haizmann Berlin, 17.1.2012

Summary...

No Standard Contractual Terms

=

No OTC Market in any Commodity


Agenda

EFET Vision of Standardisation

Physical Commodities Trading Agreements

The EFET Gas Master Agreement – why use it?

Basic Mechanics EFET Gas Master Agreement

Why does Turkey need Standardisation

Q&A


OTC Trade as Continuous ProcesssMany Products = Same Contractal Terms


The Challenge: “right” agreement for each type of transaction

ISDA covers a wide scope of financial products, including commodities

EFET Gas and EFET Power cover continental gas, power and emissions with physical settlement

EFET does not provide for cash settlement

IETA offers standard documentation for emissions trades


The ISDA Master Agreement

2005 Commodity

Definitions

Schedule

ISDA MASTER

AGREEMENT

Physical Gas Annex

•European Gas Annex (NBP and ZBT*)

•North American Gas Annex

Physical Coal Annex

•Global Physical Coal Annex

Confirmations

Physical Emissions Annex

•EU Emissions Allowance Annex

*out of date

Physical Power Annex

•Grid Trade Master Agreement (GTMA) Annex

•North American Power Annex


Physical Commodity Trading Agreements

Gas and

Power

(Emissions)

Power UK

Coal

Emissions – now mainly used for spot

Precious Metals

Bespoke


The EFET Master Agreement

EFET GENERAL

AGREEMENT

Election

Sheet

TTF (Netherlands) ZBT (Belgium)

NBP (UK)

PSV (Italy)

PEG (France)

Austrian VTP

Gaspool (Germany)

PSV (Italy)

UK Beach

Polish VP Appendix

Credit

Support

Annex

Gas

Confirmation

Emissions

Allowance

Annex

Power

EFET Individual

PRISMA Gas

Capacity

Contract


EFET AGREEMENT SHOULD BE USED HERE...

Reference: PwC – Liberalization Effects on Turkish Energy Market – 2011 Nov 18 –

Istanbul Traders Event – Slide 3

FET Gas Master Agreement: – is used mainly here…

Advantages of the EFET Master Agreement

Ensures smooth operational processes and avoids back to back risks; allows for speedy negotiations and high volume trading

Credit clauses allow parties to monitor each other’s creditworthiness over time

Close-out netting and single agreement character to avoid cherry picking by liquidator

Endorsed by EFET Legal Committee and supported by legal opinions in various jurisdictions


EFET General AgreementI. Introduction

contractual / legal framework

simplification / standardisation

meeting on an equal footing

payment netting

close-out netting

credit risk management

Enables to focus on the trading business

Advantages of Master AgreementsAdvantages of Master Agreements


EFET General AgreementI. Introduction

developed by EFET in 2000 with the objective of:

balanced position of the Parties, big or small, seller or buyer

suitable for all local power trading markets

shall cover the whole power trading business of the Parties

shall fulfill all regulatory requirements to a standard document

accepted and established as a “Standard” across Continental Europe

EFET facilitates the speedy negotiations

The EFET General AgreementThe EFET General Agreement


EFET General Agreement II. Contractual Structure

General Agreement

(“main body”)

› Who can use it as a Party?

traders, generators, suppliers, grid operators, customers, having access to the grid

› Products:

standard physical power products (base/peak, intraday, spot, forward),

non-standard physical power products or physical power options as well


EFET General Agreement II. Contractual Structure

General Agreement(“main body”)

ElectionSheet

› Election Sheet (contains the results of the negotiation between the Parties):

› Clauses marked („...unless otherwiese specified in the Election Sheet…“) in

the main body have to be customised.

› Any other clause may be customised.


EFET General AgreementII. Contractual Structure

General Agreement

(“main body”)

Annexes & Appendices

ElectionSheet

› Annexes (part of the General Agreement by default):

Definitions, Confirmation templates

› Appendices (optional, selection):

Credit Support Annex (bilateral Margining),

Allowances Appendix (Emissions Allowances)

ElectionSheet



General Agreement

(“main body”)Annexes & Appendices

Individual ContractIndividual Contract





ElectionSheet

single agreement concept (§ 1) single agreement concept (§ 1)

General Agreement

(“main body”)


ElectionSheet

ElectionSheet



priority (§ 2.2)priority (§ 2.2)

General Agreement

(“main body”)Annexes & Appendices






ElectionSheet

General Agreement

(“main body”)


ElectionSheet

ElectionSheet


EFET General AgreementIII. Essential provisions of the Agreement

LegalLegal

RISKSRISKSOperation

al

Operational CreditCredit


§3 Concluding and Confirming Individual Contracts

The contract can be concluded in any form of communication

Confirmation merely documents an agreed transaction; standard confirmation templates

Contract becomes legally binding from the time the commercial terms are agreed

Many companies send Confirmation for each transaction (regardless of whether they are Seller or Buyer); electronic matching for flow deals common

§ 3.4: Only very few companies maintain authorised trader lists (administratively too burdensome)


§ 4 Primary Obligations – Delivery and Acceptance


§5 Options

Provides for definition of simple Put and Call option

Premium payable on

5th Business Day unless otherwise agreed

If Option is exercised verbally it requires confirmation in writing

No automatic exercise


§ 6 Delivery, Measurement, Transportationand Risk

Seller represents that it has right to transfer to Buyer full entitlement to the gas, free and clear of encumbrances

Measurement of gas in accordance with nomination and allocation arrangements at the Delivery Point

Seller bears risk and bear all costs up to the Delivery Point, Buyer at and from the Delivery Point


§ 7 Risk and Force Majeure

that it could not reasonably have avoided or overcome

makes it impossible for the claiming party to perform its delivery or acceptance obligations

An event beyond reasonable control of Party claiming Force Majeure


§ 7 Force Majeure

Interruption or curtailment of gas flows as a result of Transportation Failure – 2 legs:

Beyond the reasonable control of the party claiming FM

Beyond reasonable control of TSO which could not reasonably have been avoided or overcome by it and which makes it impossible for TSO to fulfil its obligations (delivery and acceptance of Gas)


§ 7 Force Majeure

Planned and unplanned Maintenance is included in Force Majeure unless the maintenance has been notified prior to entering into the Individual Contract

Obligation to notify and mitigate effects of Force Majeure

Long Term Force Majeure -> Walk-away!

3 months ˂ Z x 90/365 ˂ 1 year or 50% of contracted quantity

EFET Gas Force Majeure standard is generally not amended in order to avoid back to back risks!


§ 8 Remedies for Failure to Deliver and Accept


§ 8a Off-Spec Gas


§ 9 Suspension of Delivery or Acceptance

Suspension right only available if a) failure to pay or b) failure by Credit Support Provider to provide, replace or increase guarantee

3 Business Days prior notice required

Non-defaulting Party’s right to

a)Suspension of delivery or acceptance of Natural Gas and

b) Withhold payments owed to Defaulting Party


§ 10 Termination for Material Reason

If Material Reason with respect to a Party has occurred and is continuing, the other Party may terminate the Agreement by giving the other Party notice

Notice of Termination for Material Reason orally or in writing if confirmed in writing within 2 Business Days. Notice MUST specify the reason for termination

Termination to be effective at terminating party’s choice on any day between day on which termination notice has been received and 20 days after such day

Automatic Early Termination in the event of Insolvency required by some jurisdictions -> Early Termination Date for all Individual Contract occurs

immediately and automatically


§ 10 Termination for Material Reason

INSOLVENCY EVENT:

Law of the incorporation of counterparty applies not law chosen to govern Agreement

Close-out netting enforceable? EFET provides up to date netting opinions

TERMINATION AMOUNT: Calculation in accordance with §11

Costs – (Losses + Gains)

No replacement transaction required


Close-Out Netting - a reminder

Close-out netting is process by which, following an early

termination of the Agreement:open transactions between two parties are terminated;each terminated transaction is valued; andall the termination values, together with any unpaid amounts, are reduced to

a single net amount owed by one party to the other.

Reduces Credit Risk–can reduce exposure in close-out as exposed only up to the net amount of mutual obligations

–can reduce collateral-posting requirements by netting collateral requirements across agreements

Expands Credit Lines

Reduces Regulatory Capital Requirements–regulators are willing to require a lower amount of capital to cover transactions if netting arrangements are in place


§ 14 Taxes

For Turkish market a warehousing solution is needed

No VAT

NO STAMP DUTY

EU is now implementing reverse charge mechanism

Wholesale Market exempt from VAT


§ 16 Credit Support § 17 Performance Assurance

If a Material Adverse Change in respect of other Party has occurred (subjective standard but good faith) the other Party has the right to request Performance Assurance

Material Adverse Change: EFET provides for defined list of events (see next slide) but some parties expand list (e.g. add ISDA like language)

Letter of Credit, cash or other security reasonably acceptable to other Party

Parties may on Effective Date or upon entering into Individual Contract agree on Credit Support (PCG, bank guarantee, cash etc. ); Credit Support Annex


§19 Assignment

Neither Party has right to assign its rights and/or transfer its obligations to a third party without prior consent. Consent not to be unreasonably withheld

Election: Assignment to Affiliate without consent if

a)Of the same creditworthiness and

b)Is incorporated in the same jurisdiction


§21 Representations and Warranties

POWER TO EXECUTE

NO INSOLVENCY

ENTITY DULY ORGANISED

ACTING FOR ITS OWN ACCOUNT

PRINCIPAL

LICENCES, GOVERNMENTAL

AND REGULATORY APPROVALs

PRINCIPAL LINE OF BUSUINESS


§22 Applicable Law and Jurisdiction

Option A: English Law and Arbitration at London Court of International Arbitration

Option B: German Law and Arbitration at German Institution of Arbitration

Some parties agree on ordinary courts e.g. English courts

If other law applied prior legal review required!


EFET Gas and Gas Hub Terms

Vitual Point

No Hub Terms required,

Use of the EFET Gas for

any paper transactions

Physical Hub

Physical delivery at Hub

Requires Appendix


Gas Appendices for Virtual Trading Points and Hubs

TTF (Netherlands)

ZBT (Belgium)

NBP (UK)

AOC (Spain)

PSV (Italy)

PEG (France)

Austrian VTP

Polish VP

Gaspool (Germany)

UK Beach

Area D - Norway (in preparation)

Jan HaizmannDirector of the EFET Brussels EU Liaison Office

[email protected]

Euractiv Italy’s Conference“Diamo voce all’Italia in Europa”Rome, 17th October 2011

Jan Haizmann Rome, 17th October 2011

European Federation of Energy Traders

48

Giving voice to Italy in Europe:The EFET contribution

Aim:Tradingwithoutborders


Thank you for your attention!

European Federation of Energy TradersEU Liaison Office

Rue Le Correge 931000 Brussels

Tel: +31 (0)20 5207970Email: [email protected]

www.efet.org

Dr. Jan HAIZMANN LL.M. Legal Committee Chairman, Member of the Board [email protected] Jan...

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