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MISO seeks credit policy changes to protect traders from market default exposure

With an eye on further mitigating the risk that future defaults in the financial transmission rights market could pose to market participants, the Midcontinent ISO proposed adding minimum collateral and mark-to-auction provisions to its FTR credit collateral requirements.

Grid operators are expected, under the Federal Energy Regulatory Commission's policy on electric creditworthiness, to implement credit policies that limit market participants' exposure to costs tied to defaults.

A major default in PJM Interconnection FTR market in 2018 highlighted the financial harm an under-capitalized market participant could inflict on other traders and the market as a whole, as well as the need for grid operators to ensure collateral posted by traders is commensurate with the risk posed by the size of their FTR portfolios.

MISO conducts FTR auctions on an annual and monthly basis to help market participants manage day-ahead congestion cost risk between generation sites and load centers. It contends that "generally higher collateral requirements and less potential risk exposure" have made its FTR market inherently less risky than the PJM market structure that led to the June 2018 default of Greenhat Energy LLC.

Still, MISO accelerated its evaluation of its collateral requirements, and lessons learned from the GreenHat default underpinned its Oct. 10 filing with FERC.

The proposed credit policy changes would "ensure that, after the FTR auction, [market participants] maintain a minimum amount of collateral on a per MWh basis, and that MISO captures a more timely, realistic, and forward-looking sense of any FTR portfolio's exposure," the grid operator said. The proposal preserves the grid operator's current FTR collateral requirements and adds a 5 cents/MWh collateral requirement as well as a mark-to-auction collateral requirement.

To determine the collateral needed from a market participant, MISO intends to calculate the estimated congestion using its current method, the 5 cents/MWh collateral requirement, and the mark-to-auction multi-period-monthly-auction clearing price. It would then base the required collateral on the greatest of those three calculations.

FTR position offsetting currently enables large negative and large positive FTR positions to potentially net out in a given month, "allowing significant positions to be held with little to no collateral requirements, and producing a collateral requirement disproportionate to the risk," MISO said. "As a result, adding a minimum $0.05/MWh requirement will ensure that there is reasonable protection for all FTR MWs owned throughout their life cycle, and limit the ability of a negative auction price to offset potential exposure."

The grid operator explained in the filing that the goal of minimum credit requirements was "to limit offsets after the initial collateral for the auction is no longer required because offsets may result in little to no collateral being held in spite of a large, though offsetting, set of risks."

The mark-to-auction collateral requirement, MISO said, would address the current lag in MISO's ability to adjust collateral to changes in congestion and exposure. "A mark-to-auction provision captures forward price signals earlier because, as positions change, it allows MISO to ask for more collateral than what was initially provided," the grid operator said.

"Adding this more forward-looking component will capture additional exposure to potential losses much earlier and prevent any [market participant] from withdrawing collateral before expected losses are realized," MISO said.

MISO asked FERC to act on its proposal by Dec. 10 so it may put the new collateral requirements into effect June 1, 2020, in time for it to be applied to any FTRs acquired during its 2020 annual FTR auction. That auction will run from mid-April 2020 to May 2020 for the acquisition of FTRs for the 2020-21 planning year.

MISO said approval of its proposal was needed significantly in advance of the requested effective date to allow "enough time to develop, test, and effectively implement the new calculations in advance of the 2020 FTR annual auction," and give auction participants certainty and an ability to prepare for the new collateral requirements. FERC has already approved minimum collateral and mark-to-auction provisions for PJM. (FERC docket ER20-73)

Jasmin Melvin is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.