Detailed Glossary

A Detailed Glossary of Energy Trading terms for registered users

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by System Administrator - Thursday, 19 March 2015, 5:34 PM

A form of settlement where responsibility for payment is passed to a third party: a Clearing House or Clearing Broker

The Clearing House accepts responsibility for settling the deal.

Credit risk for the seller in the trade is reduced to almost zero

The Clearing House minimizes its Credit Risk by daily margining


An organization may trade on an Exchange either by becoming a member of the Exchange, or trading through an Exchange Broker. The clearing principles are similar in either case

In general a trading organization engages a Clearing Broker to act on its behalf

The trading organization is required to open a margin account with the Clearing Broker, which in turn maintains a margin account with the Exchange's Clearing Bank

As the organization enters into a trading position the Exchange marks the trades to market on a daily basis, and transfers cash into or out of margin accounts based on the change of the value of the trading position since the previous day. The Clearing Broker mirrors this operation to its clients' margin accounts

Every trading organization is required to maintain an amount of cash in the margin account to cover a substantial short term loss in the value of its position. If the trading organization does not maintain this margin then the Exchange closes out the position immediately, using the margin account cash to cover any losses as a result of the close out

Payments into the margin account as a result of new trades that cause an increased open position are called Initial Margin payments

Payments into the margin account as a result of the value of trades falling are called Variation Margin payments


Close out

by Nick Henfrey - Thursday, 19 March 2015, 5:37 PM

Flattening an open position to a net zero (or flat) position


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:

  • There is no valuation uncertainty
  • Payment has been made
  • There will be no delivery


by Nick Henfrey - Thursday, 19 March 2015, 5:39 PM

A Confirmation is a document describing a trade that has been executed, and is generally sent by the Seller to the Buyer to check the trade details, to be returned by the Buyer confirming that the trade details match the trade as they have recorded it

The Confirmation, or Confirm, process allows both parties to agree the trade details


The Confirmation process, and the form of the Confirmation document are defined in the Master Agreement, usually as an Appendix

The Confirmation match is the final stage of the contract between the two parties, without it the trade is not legally binding, as well as specifying the trade details the Confirmation also specified the Master Agreement under which the trade was executed

Confirmations are not normally produced for Exchange trades

Some parties produce and send Confirmations for both Buy and Sell trades

Confirmations must be signed by an authorized signatory in the Trading Organization

Confirmations are normally produced and signed electronically

Matching Confirms tends to be a manual process - systems of bar coding have been proposed

There are schemes that electronically confirm trades, generically known as ECM (Electronic Confirmation Matching)

These are generally point to point - but there is no reason not to utilize a centralized matching service 


Delta Hedge

by Nick Henfrey - Thursday, 19 March 2015, 5:47 PM

To offset the delta of an option or other non-linear trade, usually with a linear derivatives position


If we buy a simple call option, or sell a simple put option, then we may or may not have a long position when the delivery date of the (potentially exercised) contract is made

In reality the option will either get exercised or not - let's say the option is for the delivery of 1,000 MT of coal in January 2016 at ARA (Amsterdam Rotterdam Antwerp location) - we will either have a position of 1,000 MT at that time, or not

On any particular day the option will have a calculable delta, which roughly translates into a probability of the option being exercised:

An option with a delta of 0.01 has a 1% chance of being exercised

An option with a delta of 0.5 has about a 50% chance of being exercised

Traders generally hedge the exposure of the option (which is the delta times the volume), so if the delta is 0.5 they will hedge 500 MT of coal

In general as the option exercise time approaches the delta of the option will swing quite rapidly toward 0 or 1 (or -1) so that the hedge swings toward 1,000 Mt or 0 MT

If you're wondering why an option with a delta of 0.5 (meaning the value of each MT changes by €0.5 for each change in €1 per MT in the value of coal) has a 50% chance of being exercised then think the other way round - if the option was certain to be exercised then its value would change by €1 per MT per change of €1 per MT in the price of coal, so its delta would be one - the delta is effectively the probability of being exercised




by Nick Henfrey - Thursday, 19 March 2015, 6:02 PM

A type of trade or instrument which has a value dependent on an observable value, which is usually, but not always, the price of a physical commodity.

The observable value is called the underlier


Any energy trade type that does not involve immediate delivery is a derivative - because the value of the future delivery varies with the expected price of that commodity at that location at the time of delivery

The only significant exception is a Spot or Prompt trade, which involves immediate, or near immediate delivery




by Nick Henfrey - Thursday, 19 March 2015, 6:14 PM

The unhelpful sounding physics definition: Energy is the capacity of a physical system to perform work

We know energy: light, heat, electricity, kinetic (motional) energy, potential (the energy something gets when we lift it up) energy etc.


The initial definition is actually more helpful than it might first appear

In general we are more interested in what energy transitions can do for us than the energy itself

For example electricity is a form of energy - but we are interested in what it can do for us - we can use it to generate heat, run washing machines, pumps etc.

Energy commodities that are themselves not energy contain chemical energy that may be released when we burn them:

  • Gas can be burnt for heat, and to generate electricity
  • Coal can be burnt for heat, and to generate electricity
  • Oil can be burned for heat, and in automobiles and trucks for locomotion

Energy = force x distance

Energy = power x time (or power = energy per unit time)

Physicists measure energy in:

  • Ergs (cgs system, one dyne force acting over one centimetre)
  • Joules (SI unit, one Newton force acting over one metre)

Traders measure energy (most frequently) in




by Nick Henfrey - Thursday, 19 March 2015, 6:16 PM

An Exchange is a trading organization which matches bids and offers on standardized contracts to form trades. Unlike a Broker the Exchange acts as the counterparty for the trades, and trading is anonymous


An Exchange offers standardized contracts, normally

  • Spots - Forward trades for Prompt delivery (today, tomorrow - day ahead, and sometimes for the forthcoming weekend
  • Futures - Contracts for future delivery, usually weeks, months, quarters, seasons and years, in standardized volumes or rates (e.g. therms per day, Megawatts, Tonnes)
  • Swaps - Financially settled Contracts in the future, usually between a fixed price and an index, or between two indexes
  • Options - Options on standardized contracts for future delivery, offered at a trade price or premium, with a range of strike prices, puts and calls, expiry dates and delivery dates

Spots are delivered and settled in a matter of days - settlement occurring through movement of funds held in a cash account

Futures may be physically or financially settled - credit risk is reduced through daily margining. Physically settled Futures are either converted to equivalent Spots at expiry, or alternative physical delivery is agreed between partners

Swaps are always financially settled through margining

Options, like OTC options, have a defined expiry date, at which time they or may not be exercised, usually into the corresponding exchange traded Futures



by Nick Henfrey - Monday, 23 March 2015, 7:47 AM

Physically settled trades have a delivery time or period specified in the terms (details) of the trade

Delivery is the physical act of delivery of the traded commodity at the location and time specified in the trade details


The act of physical delivery is made in different ways according to the commodity:


Location is some specified point on the gas pipeline network

Time is usually specified at daily granularity, a trade may cover one or more days, months, quarters or seasons

Power (electricity):

Location is some specified point on the electricity grids

Time may be specified at quarter hour or above granularity

Oil & Coal:

Location is specified as a port, or group of ports in the trade details - the specific port or docking location is specified later by mutual agreement within the terms of the trade.

Time is usually specified at monthly granularity - the specific dates being agreed later as shipments become clear 

In general:

Gas and power delivery continuously throughout the delivery period, and the delivery volume is often specified as a rate of delivery

Megawatt (MW) for power - remember one MW flowing for one hour is a Megawatt.Hour (MWh)

Therms per day (therms/day) for gas

Oil, coal, LNG and most other commodities are delivered in discrete consignments at mutually agreed points in time during the delivery period



by Nick Henfrey - Monday, 23 March 2015, 8:05 AM

A generic legal term for transferring existing contracts from one legal entity to another


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:

  • Trades that finish delivery before the novation date and time are left as is
  • Trades that start delivery after the novation date and time are amended so that the counterparty is changed from the old legal entity to the new
  • Trades that are scheduled to deliver through the novation date (that is they start before the date and time, and finish after the date and time) are split:
    • The original trade is amended so that its end date and time is set to the novation date and time
    • A new trade is created that has start date and time set to the novation date and time, end date and time set to the original end date and time of the original trade - all other attributes (price, volume etc) stay the same


by Nick Henfrey - Wednesday, 25 March 2015, 5:43 PM

A fee is a cash payment which may be associated with:

  • A single trade
  • A group of trades
  • No specific trades


Fees are usually cash payments that are not directly related to delivery of a commodity

There are four general categories of fees:

  • Broker and clearing fees - fees associated with the execution of each trade - these can normally be booked directly against each trade as the ay are incurred
  • Trade services fees - fees generally associated with the delivery of physically shipped commodities like coal and oil - again normally booked against individual trades as they are incurred
  • Non-trade specific fees - cash costs which are incurred as a result of trading - but cannot be allocated to specific trades - for example imbalance costs
  • Non-trade fees - cash costs associated with licences, membership costs etc. 

Fees booked against trades are generally associated with a cash flow type, so that they can be correctly allocated in P&L, invoicing and general ledger accounting

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