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Credit Risk Management FAQ 

1. What is Credit Cover?
2. How is Credit Cover calculated?
3. Why is Credit Cover required?
4. What is a Letter of Credit?
5. What is a Cash Collateral Account?
6. What is a Credit Cover Increase Notice (CCIN) and what should I do if I get one?
7. What is a Settlement Reallocation Agreement (SRA) and what are their benefits?
8. How do I cancel SRAs no longer required?

 

1. What is Credit Cover?

Credit Cover is the financial obligation on any new or existing Participant in the Single Electricity Market pursuant to their financial exposure while trading in the Single Electricity Market (SEM).

 

Initial Credit Cover is required to be put in place by the proposed Participant prior to the Effective Date in respect of each such Unit calculated with effect from the Effective Date.

 

Once a Participant becomes effective in the Market, calculations are carried out for every working day of the market (i.e. Monday to Friday, except public holidays). A Credit Cover Report (CCR) is available to Participants by 17:00 the same day for that day's calculations.

 

This report is available on the Market Participant Interface (MPI) or via Type 3 communication (computer to computer).

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2. How is Credit Cover calculated?

Credit risk cover is calculated summing the total of the following elements:

 

  • Fixed Exposure: For each unit (Generator or Supply Unit) a Participant registers in the SEM, a fixed charge is related to those units. The fixed exposure for a Generator Unit is €5,000* per unit). The fixed exposure for a Supply Unit is a minimum of €1,000* and  a maximum of €15,000*.  This is based on an average of forecast volumes (average of 100 days of forecast data * 8.77**).  If this figure is greater than €15,000 the fixed exposure will be capped at €15,000, if this figure is less than €1,000 this figure will be capped at €1,000, and if the figure is in between the two figures then the fixed exposure will be the figure in between.
  • Invoiced: Amounts invoiced but not paid (Actual Exposure)
  • Settled not Invoiced: Settlement amounts calculated but not invoiced (e.g. Indicative or Initial settlement of Energy, Variable Market Operator Charge & Capacity (Actual Exposure)).
  • Not Settled: Exposure incurred but not calculated (i.e. Indicative Energy, VMOC & Capacity where settlement has not taken place.
  • Future Exposure: Potential future exposure. Time to remove the Participant from the market (suspension delay period), or move all customers to Supplier of Last Resort (SOLR)
  • Resettlement: M+4 and M+13 Settlement exposures

* Or GBP equivalent

** As set out in the SEM Parameters for the Determination of Required Credit Cover

 

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3. Why is Credit Cover required?

Credit Cover is posted collateral, in the form of cash or Letter of Credit and is required to ensure the Single Electricity Market (SEM), and its Participants, are protected from the financial risk of a Participant not paying their outstanding debts to the SEM.

 

Effective management of this risk is essential to ensuring the financial integrity of the SEM.

 

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4. What is a Letter of Credit?

A Letter of Credit is a legally binding document that a Participant requests from their bank. It provides a guarantee that monies will be made available to the Market Operator should that Participant be in default in relation to any outstanding payments. It is also a means for a Participant to meet their Credit Cover obligations as per the Trading and Settlement Code.

 

The Letter of Credit must be provided by a bank that has met the SEM Credit Cover Provider criteria. Trading & Settlement Code section 6.163 provides further information on such criteria.

 

A template for the Letter of Credit is available in Appendix A of the Trading and Settlement Code, which can be found here.

 

Please note, this is a legally binding document between all parties and, under the Trading & Settlement Code, no amendments can be accepted by the Market Operator in respect of its wording. A Participant’s registration in the Market cannot be completed until such time as this Letter of Credit has been approved.

 

Guidelines on the setting up and submission of a Letter of Credit can be found here.

 

An alternative to a Letter of Credit is to set up a Cash Collateral Account.

 

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5. What is a Cash Collateral Account?

A Collateral Account is a cash account, set up by the Market Operator at the request of a Participant and held in trust for that Participant by the Market Operator.

 

Once this account has been set up, a Participant can deposit funds into the Collateral Account to assist in meeting their Credit Cover obligations.

 

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6. What is a Credit Cover Increase Notice (CCIN) and what should I do if I get one?

A CCIN is issued in the event of a Participants Required Credit Cover exceeding their Posted Credit Cover. It indicates that a Participant does not have sufficient Credit Cover in place to meet their SEM obligations and must rectify the situation within 2 working days.

 

Every Working Day in the Market a Credit Cover Report (CCR) is produced for all Participants registered to trade in SEM. This report is available via the Market Participant Interface (MPI). It contains details of a Participant’s Posted Credit Cover, Required Credit Cover and a breakdown of the exposure in the SEM that makes up the Required Credit Cover. If a Participant’s Required Credit Cover is greater than their Posted Credit Cover that Participant will be issued with a CCIN by 17:00 by fax. This notice must be complied with within 2 working days.

 

There are a number of ways in which a Participant may resolve a CCIN within the allotted 2 working days:

  • Payment of an any outstanding invoice(s) – this may decrease their Required Credit Cover to a figure that is less than their Posted Credit Cover
  • Increasing the value of any Letter of Credit - thereby increasing their Posted Credit Cover above their Required Credit Cover.
  • Increasing their Cash Collateral Balance - thereby increasing their Posted Credit Cover above their Required Credit Cover.
  • If a Supplier enters into Settlement Reallocations (SRAs) with a Generation Participant, thereby reducing their Required Credit Cover.

If a CCIN is not resolved within 2 working days, a Participant will be considered in Default and in breach of their obligations under the Trading & Settlement Code. They will be issued with a Default Notice immediately and proceedings to suspend from the SEM will commence. It is therefore very important that Participants monitor their Required Credit Cover and ensure they take measures to avoid CCIN’s or at the minimum have the processes in place resolve the CCIN within the 2 Working Day timeline.

 

Please refer to Section 6.179 of the Trading & Settlement Code for further information.

 

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7. What is a Settlement Reallocation Agreement (SRA) and what are their benefits?

SRA (Settlement Reallocation Agreement) is an agreement made between two participants whereby one Participant (the Credited Participant, usually a Supplier) will be credited with a trading amount and the other Participant (the Debited Participant, usually a Generator) will be debited with an identical trading amount for a given Trade Date and Trading Period.

 

SRAs can only be submitted by the Debited Participant and are limited to a maximum of 6 SRAs per Trading Day.

 

There are a number of benefits associated with using SRAs:

 

Credited Participants can reduce their Required Credit Cover by offsetting the exposure against the exposure of the Debited Participant through the Market

 

Credited Participants can reduce cash flows – SRAs reduce total invoice payment amounts due in the SEM, as the SRA component is settled by the Debited Credit Participant out of the Market.

 

SRAs will be cancelled if:

 

The SRA causes the Settlement Reallocation Amount to exceed the Trading Payments or Capacity Payments due to the Debited Participant in respect of its Generator Units for that Settlement Period, as applicable.

 

Where the Debited Participant has multiple SRAs, which in total cause the Settlement Reallocation Amount to exceed the Trading Payments or Capacity Payments, due to that Participant in respect of its Generator Units for that Settlement Period, as applicable, the SRAs will be cancelled in the reverse order of receipt (i.e. the most recently received being the first to be cancelled) until those remaining in total no longer exceed the Trading Payments or Capacity Payments due to that Participant in respect of its Generator Units for that Settlement Period.

 

An SRA will be cancelled during Credit Cover processing, if that SRA causes the Debited Participant’s Required Credit Cover to exceed the Participant’s Posted Credit Cover.

 

 

Please refer to Section 6.235 of the Trading & Settlement Code for further information.

 

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8. How do I cancel SRAs that are no longer required?

In order for a Participant to cancel any SRA with the Market Operator, a SRA Cancellation Request must be submitted by an Authorised Person from both parties to the SRA and submitted to the Market Helpdesk by email and via the MPI.

 

The criteria for acceptance of the cancellation request are:

 

The request must be made prior to 17:00 on the second Working Day after the end of the first Billing Period or capacity Period to which the Settlement Reallocation Agreement relates.


The credited Participant must not, at the time of the request, be in default of any payment due under the Trading & Settlement Code.

The SRA cancellation must not cause the Required Credit Cover of the Credited Participant to exceed its Posted Credit Cover

A cancellation form must be received from each of the two parties to the SRA

 

Please refer to Section 6.246 of the Trading & Settlement Code for further information.

 

 

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SEMO is a joint venture between EirGrid PLC and SONI Limited