FAQs

GENERAL QUESTIONS

What does NGX stand for?
Natural Gas Exchange.

Where is NGX based?
NGX is headquartered in Calgary, Alberta, with additional offices in the US and Eastern Canada.

How long has NGX been in business?
NGX has operated continuously as an exchange and clearing services provider since February 10, 1994.

Who owns NGX?
NGX is 100% owned by TSX Group, which also owns and operates Toronto Stock Exchange and TSX Venture Exchange

What does NGX do?
NGX operates Canada's leading energy and North America leading clearing and settlement facility.

How active is NGX?
In 2006, NGX processed and cleared over 200,000 transactions with over $60 billion in notional value annually with a zero-defaulted history.

For what products does NGX offer trading and clearing services?
NGX's core product suite consists of a wide variety of physical spot and forward natural gas products, coupled with natural gas and electricity swaps. NGX is always evaluating opportunities to branch into new products in other commodity groups. NGX also offers a physical electricity ancillary services trading market in Alberta throught the Alberta Watt Exchange system.

How many customers does NGX have?
Over 160 firms have executed the NGX Contracting Party's Agreement. They are all able to transact with each other anonymously through NGX acting as a central counterparty.

Where does NGX offer trading?
NGX has been the preeminent electronic exchange for Canadian natural gas business for over a decade. NGX offers natural gas trading and clearing services in physical and financial instruments in the U.S. as well. Customers frequently transact in both the Canadian and U.S. products.NGX's markets are accessible through the ICE trading platform.

What does NGX charge for its services?
NGX charges a monthly access fee and volumetric transaction fees. The current fee schedule may be found in the secure area here.

TRADING

Who can I call if I have questions or problems with NGX services?
Contact the NGX Help Desk at (403) 974-4357 (HELP), or email ops@ngx.com.

What is an Administrator?
An Administrator is an individual designated by your company to manage access and permissions with regard to all NGX systems. Email ops@ngx.com if you do not know who this individual is for your company.

How can I verify the deals I have done?
Traders may see details of all their deals through ICE reports, and all their cleared deals through NGX reports. NGX reports include additional details on margining, invoices, and delivery obligations.

What is the standard NGX contract size?
There is no standard contract size for NGX instruments

Can market participants, that do not want to schedule physical volumes still transact physical products on NGX?
Any company that wants to trade physical volumes on NGX can do so without having to schedule/nominate the transactions to the pipeline by simply closing out the delivery position on NGX before the appropriate trading deadline. This can be done using different products that deliver to the same point, e.g. fixed price and index products. Contact marketing@ngx.com for more information.

Are physical deals transacted on NGX included in the monthly and daily index?
In Canada, the published Canadian Gas Price Report daily and monthly indices are wholly based on fixed price deals transacted through NGX. Traders can see the running index average on NGX, real-time, right up until the index is officially set. In the U.S., traders report their fixed price trades directly to the respective publications for inclusion.

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CREDIT/RISK MANAGEMENT

Do all transactions on NGX get cleared?
No. Whether a pair of matched orders results in a cleared or bilateral transaction is a funtion of the preferences set in a company's counterparty filter of a trader's portfolio set up in WebICE. In Canadian markets most transations clear through NGX.

What are the benefits of central counterparty clearing?
Central counterparty clearing allows NGX to provide anonymous trading by placing NGX between the buyers and sellers as a common counterparty. In addition to anonymity, central counterparty clearing affords the following key benefits:
  1. Neutral, Independant Risk Management - NGX is impartial and the nature of the clearing business provides a strong incentive to maintain a default-free clearing operation. Furthermore, NGX is not a market participant, does not take a market view, and earnings are not directed by commodity prices.


  2. Centralized Collateral Requirements - Concentration of capital with NGX affords the most efficient allocation of collateral by providing single–point access to a large number of counterparties.


  3. Counterparty Netting Facilities - Central counterparty clearing and standardized netting rules create an environment to net physical and financial exposures across multiple counterparties and locations/instruments.


  4. Close Out Procedures - NGX has embedded, and has enforced, rights of acceleration for all contracts traded through the Exchange to mitigate credit default, and delivery risks to all Contracting Parties.


What are the performance risks associated with forward contracts?
NGX’s clearing and risk management structure exists to assure the continued performance of all contractual obligations in the event of a Contracting Party performance default. Contractual defaults are detailed in the Contracting Party’s Agreement, with the key performance risks summarized as follows:

  1. Failure to Make/Take Delivery - For physical contracts, the failure by a Contracting Party to deliver natural gas sold, or the failure to take natural gas bought, results in an NGX imbalance with the pipeline or hub operator. In this event, NGX is responsible for procuring alternate gas supplies or alternate gas markets to rectify such an imbalance and prevent the default from affecting any other Contracting Parties.


  2. Failure to Pay - The failure by a Contracting Party to pay for gas purchased or for an out-of-the-money financial contract at the time of settlement, resulting in an NGX imbalance with its Settlement Bank. In this event, NGX is responsible for utilizing the collateral provided by the defaulting party to rectify such an imbalance and prevent the default from affecting the Settlement Bank or any other Contracting Parties.


  3. Failure to Deposit Collateral - The failure by a Contracting Party to deposit collateral with NGX, in the form prescribed by and acceptable to NGX, sufficient to ensure that their Margin Requirement (see below) remains below 80% of their collateral balance. In this event, NGX is responsible for ensuring that the defaulting party is unable to increase their risk position to the point where they bring unsecured risk to the clearing operation. This can be rectified through trading restrictions or through liquidation of the Contracting Party's portfolio, where necessary.


How are performance risks mitigated for deals done on NGX?
NGX’s Risk Measurement model is based on quantifying the default of a contracting party as a monetary value called the Margin Requirement which is then used as the basis for NGX’s collateral requirements. NGX’s Margin Requirement represents a measurement of: the probable exposure that the portfolio of a Contracting Party might bring to the clearing operation in the event of a default by the Contracting Party.

The Margin Requirement is made up of the sum of three distinct components:
  1. Accounts Receivable Risk – the value of gas already delivered that generates a net amount owing to NGX.


  2. Variation Margin (mark-to-market) – a calculation of the price at which a forward position could be instantaneously liquidated given current market prices


  3. Initial Margin (liquidation risk) – a buffer charged to account for changes in market prices (i.e. Variation Margin) during a liquidation scenario.


    4. NGX’s risk management policy requires that each Contracting Party must post sufficient collateral to cover its Margin Requirement, as described above, utilizing any combination of the acceptable forms of collateral and offsets. It is important to note that collateral is held to support a specific Contracting Party’s traded positions and can only be used to remedy a performance failure by the Contracting Party itself.

How is Initial Margin calculated?
Initial Margin is calculated by assessing the actual price movements that have occurred in the recent history of each product, then applying a Value at Risk (VAR) model to determine the probability of those price movements occurring during a liquidation period. Initial Margin is the result of applying this probability to the current market price of each product for each forward date, and is an estimate of the risk within a certain confidence level.

NGX’s Initial Margin VAR model uses the following parameters when calculating the Initial Margin rate:

  1. Standard Deviation = 2.7, equivalent to a 99.7% confidence interval.


  2. Hold Period = 2 or 5 days (Depending on market liquidity).


  3. Number of Days History = 2 years.


What assurances does a Contracting Party have that NGX will perform on its clearing and settlement obligations?
Clearing Capital and Settlement Structure:



In order to assure Contracting Parties that the clearing operation can withstand a Contracting Party default, NGX has established the non-mutualized clearing capital structure illustrated above. This clearing capital mechanism is in place to provide lines of defense against the default of a Contracting Party or multiple defaults of Contracting Parties. The following are the lines of defense against a payment default by a Contracting Party:

  1. Settlement Banking Credit Facility - The role of the Settlement Bank is to assist NGX with the management of collateral in segregated accounts, to act as custodian over such collateral, to assist in the cash management required for financial settlement of contracts, and to provide overdraft protection against fluctuations in NGX’s settlement account.


  2. The overdraft protection facility allows for variable timing throughout a business day on the deposit of NGX receivables from Contracting Parties and the payment of payables to Contracting Parties. In the event that the facility is overdrawn at the close of business (due to a Failure to Pay), the overdraft will be paid using the defaulting party’s collateral.


  3. Defaulting Party Collateral - In the event of a Failure to Pay, NGX would look to the collateral posted by the defaulting party to rectify the default. The amount of collateral held by the Settlement Bank on behalf of NGX Contracting Parties generally ranges between CAD $2.0 billion and CAD $4.0 billion, depending primarily on the prevailing price of gas.


  4. NGX Cash Reserves - In the event that there is a smaller amount overdrawn from the NGX settlement account, NGX maintains its own cash on hand to temporarily rectify the imbalance until such time as the collateral can be disbursed to make up the imbalance.


  5. NGX Guarantee Fund - The NGX Guarantee Fund segregates a pool of clearing capital that is backed by NGX, however is only accessible by Contracting Parties. The Emergency Fund is in the form of a letter of credit held by CIBC Mellon and accessible through a Deposit Agreement to which all Contracting Parties are a party to. In the event of an NGX default, affected Contracting Parties may make a claim on the Emergency Fund. The fund is currently capitalized at CAD $30 million.

    In the case of a Failure to Make/Take Delivery, NGX maintains backstopping arrangements:

  6. Physical Backstopping - Delivery risks are mitigated through the use of backstopping services provided by various market participants, including storage facilities, large shippers, and pipeline operators. Backstopping is typically an arrangement for immediate provision of supply/market at a pre-determined price (usually based on index).

What forms of collateral does NGX accept?
The Collateral posted with NGX may take the form of:

  1. An irrevocable letter of credit issued by a bank acceptable to NGX – typically an A or higher rated bank.


    2.
  2. A cash amount held by NGX’s Settlement Bank, held in a segregated account.


    3.
  3. A previous month Account Payable by NGX to the Contracting Party, provided that such previous month Account Payable will only constitute collateral until the 15th day of the settlement month for physical contracts, and the 1st day of the settlement month for financial contracts.


    4.
  4. A current month Account Payable by NGX to the Contracting Party.


    5.
  5. A positive Variation Margin amount (i.e. in–the–money position), until such time as the Variation Margin is no longer positive, or until the position converts from a Variation Margin amount to an Account Payable, or Account Receivable.


    6.
How are collateral requirements managed on an ongoing basis?
The amount of collateral required is based on a Contracting Party’s Margin Requirement at any point in time. Given that the Margin Requirement changes dynamically as market prices change, and additional trades are entered into, NGX manages the collateral requirements of each Contracting Party on a portfolio basis in real time. There are 3 key triggers that NGX uses to manage a Contracting Party's collateral position:

Margin Triggers:

  1. If the Margin Requirement for a Contracting Party reaches 80% of collateral held (i.e. Margin Requirement / collateral held >= 80%), NGX will request additional collateral.


  2. If the Margin Requirement for a Contracting Party reaches 90% of collateral held, NGX may restrict the Contracting Party’s trading capabilities until the Contracting Party deposits additional collateral, and/or the Margin Requirement falls below 80% of collateral held.


  3. If the Margin Requirement for a Contracting Party reaches 95% of collateral held, and sufficient collateral has not been received, NGX is entitled to invoke the liquidation procedure under the Contracting Party’s Agreement.


    4. When requesting additional collateral, NGX will typically recommend a collateral increase by an amount which will reduce the Contracting Party’s position below 80% of collateral held, and will provide room for further trading activity.

    When NGX requests additional collateral, the Contracting Party is required to provide additional collateral that brings its position below 80% of collateral held within the next business day or, if the next business day is a holiday that is recognized by major Canadian and/or United States banks, then on the first business day that is not a recognized banking holiday following any such request.

How can a customer clear a deal that is not executed on the system?
NGX provides an over-the-counter (OTC) clearing service both for products it lists through the NGX exchange and for certain other products that are not centrally traded through the NGX exchange or through the NGX Trading System. The specifications for these products are laid out in the Contracting Party's Agreement and the terms under which these transactions are accepted, confirmed, cleared and settled are standardized as per the Contracting Party’s Agreement.

Contracting Parties who agree to bring an OTC trade to NGX for clearing first submit a request to NGX. Upon receipt of such a request, NGX will review the trade and accept or reject the trade for clearing based upon several acceptance parameters including the applicability of the product and margin standing of each Contracting Party to the trade. If accepted, NGX will confirm the trade with each Contracting Party. If confirmed, the trade will be entered into the NGX clearing system and added to the portfolios of each Contracting Party.

Fee and margin rates for transactions entered through OTC clearing are identical to transactions consummated directly through the Trading System.

OPERATIONS

How do physical trades get nominated?
For physical natural gas transactions, NGX aggregates all spot and forward transactions into net daily delivery positions. All purchases and sales for a particular delivery day are net against each other, resulting in a single title transfer requirement for each day for each Contracting Party.

NGX schedules the natural gas, and NGX flows all title transfers from net seller to net buyer through its own pipeline accounts. NGX instructs each Contracting Party as to volume obligations each day and employs a number of imbalance management mechanisms to increase title transfer reliability. NGX remains the counterparty to the transaction through the entire process, and financially assures performance of the deliveries.

What if I forget my NGX reports password?
Our Help Desk staff will be pleased to assist you -- just call (403) 974-4357. For issues regarding your WebICE password, please call the ICE Help desk at 770-738-2101.

How are customers notified of product changes or additions?
New products announcements will be posted to the News section of the web site. The Contracting Party’s Agreement contains all relevant information pertaining to NGX products. Amendments to the CPA will be mailed to Contracting Parties in advance of the effective date.

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LEGAL

How can I become a customer?
NGX utilizes a standard agreement with all the participating firms that transact through the exchange. The NGX Contracting Party’s Agreement (CPA) outlines the terms and conditions for conducting business with NGX.

How can I acquire a copy of the NGX Contracting Party’s Agreement?
Contact NGX directly at 403-974-4357 or ops@ngx.com. Existing customers may download copies.

What information do I have to provide to become a customer?
In order to assure that all Contracting Parties qualify as sophisticated investors, NGX requires the most recent financial statements available to verify that a prospective customer has a net worth in excess of $5MM (CAD equivalent) or total tangible assets of $25MM (CAD equivalent). If the prospective customer does not meet these requirements, but is a subsidiary of a corporation that does, a parental guarantee may be required.

What happens if a Contracting Party defaults?
Contracting Parties have certain obligations to perform, including:
  1. Make and/or take delivery of natural gas as per their delivery obligations;


  2. Pay for all outstanding settlement amounts; and


  3. Provide collateral as required to remain in compliance with margin requirements.


    4. In the event that a Contracting Party defaults on these performance obligations, NGX has a number of remedies. These remedies include the right to halt trading, and the right to invoke the liquidation procedure to crystallize the value of a portfolio and effectively offset the defaulting party’s obligations. Collateral from the defaulting party is used to account for any damages that arise from the liquidation.

How will a customer be notified if a product is added or changed?
The Contracting Party’s Agreement contains all relevant information pertaining to NGX products. Amendments to the CPA will be mailed to Contracting Parties in advance of the effective date. The trading system and web site will also note amendments to the agreement.

Is NGX a regulated exchange and clearinghouse?
NGX operates pursuant to a permanenet exemption order from its primary regulator the Alberta Securities Commission (ASC). NGX holds an Eligible Commercial Market status with the U.S. Commoditiy Futures Trading Commision (CFTC).

NGX has an application before the CFTC for Derivatives Clearing Organization (DCO) status.

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DATA

How can I get NGX market data?
If you are a trading customer, NGX data is available from NGX and ICE. NGX provides index and historical data. ICE provides real-time and end of day market data. If you are not a trading customer, you may become a view-only customer by contacting data@theice.com.

© 2008 Natural Gas Exchange Inc. and/or TSX Inc.
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