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Detailed Glossary
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Take or Pay | ||
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A type of supply contract in which the buyer commits to buying a minimum quantity of some product, or to make an alternative payment for the amount below the minimum quantity Take or Pay contracts are widely used in the Gas and Oil markets Detail The minimum quantity, the price of purchase, and the price paid for any amount below the minimum are all defined in the contract Typically the buyer nominates a delivery volume each day from the supplier, the minimum quantity applies over a year | ||
Swing Contract | ||
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Also known as a swing option, a swing contract is a type of contract that allows the buyer the option, but not the obligation, to take periodic deliveries of a product at a volume nominated by them between a minimum and a maximum volume at an agreed price Detail Swing contracts ate typically used in long term supply contracts of gas, oil and power They are frequently combined with a take or pay clause, which specifies that a minimum amount of product must be taken over a set of long periods e.g. A swing contract may specify that a daily volume between 10 and 100 units may be taken each day A take or pay clause may specify that a minimum of 365 * 15 units may be taken over the entire year Daily nominations of swing contracts are usually made by a particular time on the previous day, and may be transmitted electronically Valuation of swing contracts is extremely complex, because of the daily optionality, and particularly if there is a take or pay clause as the overall delivery is constrained Swing contracts may be short or long term (up to twenty-five years). Typically the price is either renegotiated periodically, or indexed to an index, or a basket of indexes | ||
Entry Capacity | ||
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Capacity to flow (usually gas) onto a National Transmission System Detail In order to flow gas on to a Transmission System a shipper needs to have Entry Capacity Entry Capacity represents a maximum flow rate that gas may be flowed onto a Transmission System over a period, and may be bought in long and short term auctions and traded bilaterally | ||
Cascading | ||
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The process of decomposing longer tenor Exchange traded derivatives (futures and swaps) contracts for the equivalent shorter contracts Detail Let's start with an example - a trader buys a futures contract for delivery for the whole of 2018, a so-called Cal-18 contract Every day that contract is available to trade, and the Exchange publishes a settlement price for that contract that determines daily margining At the time of trading (2014) the Exchange does not offer any other contracts covering 2018 - months or quarters for example At the end of 2017 the trader wants to keep the position open, but the Exchange can't continue to publish a Settlement price for the 2018 yearly contract because it can't be traded (the delivery period has already started) By this time the Exchange is offering Quarters contracts covering the whole of 2018, and Month contracts covering at least the first three months of 2018 So the Exchange, the Clearing broker and the trader all cascade the year contract into four quarterly contracts; Q1, Q2, Q3, Q4 2018. Q2, Q3 and Q4 are all still tradable, but the Q1 position needs to be closed out, or itself cascaded into three months, January, February and March As you've probably realized the January contract will very soon be untradable, so it needs to be
By cascading longer contracts into shorter contracts shortly before the longer contracts begin delivery the Exchange can effectively offer a small set of monthly, quarterly and yearly contracts, that have monthly granularity in the short term, but cover a period of years into the future As an example EEX are quoting the following Phelix Futures contracts at the time of writing (11 November 2014):
(If you're wondering why November 2014 is still being quoted then that's because it is financially settled through the delivery month - the contract is not tradable in November) | ||
Close out | ||
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Flattening an open position to a net zero (or flat) position Detail Trading activity in general leads to opening positions, and very often to closing out those positions before the delivery period For example I may sell 10,000 therms of gas for delivery May 2024 today I have an open position of 10,000 therms in 2024 Next year the price has dropped and I decide to buy back all 10,000 therms at the lower price, thus locking in a profit (sell price - buy price) x 10,000 remember when we short a position we make a profit when the price drops! I have no remaining open position in 2024 gas - so I have closed out my position I can always re-open it by executing another trade If my second trade had been to buy 6,000 therms then I would have closed out 6,000 therms, and have 4,000 therms remaining open position Closing out a Futures position on an Exchange has an additional meaning and consequence The profit or loss value would immediately be considered as realized P&L for the following reasons:
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Tolling Agreement | ||
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A general term used to describe an agreement in which one party (the toller) provides an input product to the other party, and the other party provides another product (usually derived from the input product) in return Detail In the energy sector tolling agreements may cover:
In effect a tolling agreement is a physically implemented spread | ||
Line Loss | ||
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When transmitting Electricity via Interconnector, some of the power is lost and thats called Line Loss. For UK-FR interconnector line loss factor is 1.17% | ||
Scheduling | ||
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Often used as a term for the Operational activities involved in gas and power Detail Short term position needs to be nominated or notified to the respective system and market operators:
This set of activities is often collectively referred to as Scheduling The schedule of a trade describes the delivery profile (that will need to be nominated) | ||
Novation | ||
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A generic legal term for transferring existing contracts from one legal entity to another Detail A legal entity may agree with another legal entity to transfer all, or a subset of, its contracts to another legal entity Each company that the original legal entity has contracts is notified, and a novation is agreed: that is our organization agrees to novate our contracts from the first legal entity to to the other on a particular, mutually agreed, date amongst the contracts novated will be any long term contracts, master agreements and any trades Trade novation has to be reflected in our ETRMs, and the following convention is usually followed:
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Virtual | ||
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Something that behaves like something else but is not really that thing Detail We've all heard of virtual reality - it appears (or tries to appear) real but is not, but it does have many of the characteristics of real So what does that mean for us? Well let's take a real(!) example Virtual Storage - Storage allows organizations to inject gas at one point in time and withdraw it later An organization (the seller) may sell another organization (the buyer) virtual storage the buyer of the product sells gas at no cost to the seller at some point later in time the buyer of the product requests the seller of the product to sell the gas back at no cost the seller tracks the level of virtual gas, and tracks this against the virtual capacity of the storage product sold | ||