NGX - Natural Gas Exchange: Electronic Trading in Physical and Swap Contracts of Natural Gas

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OVERVIEW

THE CLEARINGHOUSE ROLE

NGX is the clearinghouse for all cleared transactions in the NGX markets and ICE's US physical gas markets. In this role, NGX maintains a secure and efficient clearing operation, managing various risks across market participants and products.

NGX acts as the central guarantor for all cleared transactions, acting as the buyer to every seller, and the seller to every buyer. This provides full cycle anonymity, and introduces a neutral third party obligated to ensure the performance on both sides.

Since each Contracting Party agrees to make NGX the counterparty to the transaction, the Contracting Parties collectively look to NGX to manage risks to the ongoing operation of the clearinghouse.

NGX is committed to ensuring the security and integrity of the clearing operation. NGX does not enter into transactions nor take positions in energy products for any reason other than to provide clearing services.

CLEARING STRUCTURE

NGX operates a non-mutualized, private clearing operation, whereby all market participants clear directly without the mediation of a "clearing member". In order to secure the clearing operation against the failure of one or more Contracting Parties, several contingencies make up NGX's clearing structure.

In the event of a failure to perform on physical delivery, NGX has the ability to leverage backstopping contracts that provide alternate supplies or markets for physical natural gas.

In the event of a failure to perform financially, NGX may draw on collateral that has been deposited by the defaulting party in support of their margin requirement. Collateral deposited by Contracting Parties may only be used to remedy a performance failure on the part of the Contracting Party who failed to perform.

NGX does NOT in any way mutualize this performance risk across the collective group of Contracting Parties.

Margin requirements are calculated to determine the estimated cost of closing a Contracting Party portfolio, and hence incorporate unpaid receivables, mark-to-market on forward positions, and an initial margin amount on open forward positions.

Contracting Parties must deposit collateral to support their margin requirement. In the event that this collateral is insufficient to cover such a failure, NGX Contracting Parties may make a claim against the $US 100 million NGX Guarantee Fund. The NGX Guarantee Fund is supplied by NGX and held in trust by CIBC Mellon Trust on behalf of NGX Contracting Parties.

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