Detailed Glossary

A Detailed Glossary of Energy Trading terms for registered users

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by Nick Henfrey - Thursday, 26 March 2015, 7:32 AM

Like most businesses, we sell something, we deliver it, we raise an invoice, we send it to our buyer, we get paid - we hope.

The Master Agreement between us and our counterparty will specify if we raise an invoice for a specific delivery (of oil for example), or for a continuously delivered commodity (gas or power for example) over a period (usually a day, week or month)


The two main invoicing schedules are:

  • Monthly - all of the commodity that has delivered to a counterparty at a location in the last month is invoiced shortly after the end of the month. The invoice will include all trades that have delivered during the calendar month. Trades delivering over multiple months will appear on successive invoices. Each invoice will only relate to the delivery of each trade within that month
  • Delivery - typically oil is invoiced a few days after a physical shipment has occurred

Invoices usually have the following granularity:

We may therefore raise a number of invoices for a counterparty, with different combinations of the above

Once we generate, or raise, an invoice, and are satisfied that it is correct, we transmit the invoice(s) to our counterparty, and we post the invoice(s) into an Account in our General Ledger

We expect our counterparty to be doing the same for commodities that we have bought from them, and expect to receive invoice(s) that we will check against our own records

To help this we raise a set of shadow invoices, or purchase orders, so that we can compare these to the invoices received from our counterparty. Once agreed we post these purchase orders into an Account in our General Ledger



by Nick Henfrey - Tuesday, 31 March 2015, 5:24 PM

Generally a financial trading term used sometimes in the commodities trading market to mean the expiry or expiration date - particularly futures contracts


A classic energy futures contract has a single date that represents:

The last date it may be traded

The date it is cascaded to shorter contracts

The date it is completely settled (if a financial futures contract)

This date is usually called the expiry date, and therefore it is also the maturity date

However it is possible that the contract may continue to be financially settled after the last date it may be traded - in this case the maturity date is usually the completion of financial settlement

Be careful when looking at contract details - the terms are used inconsistently between exchanges and brokers...


Take or Pay

by Nick Henfrey - Sunday, 12 April 2015, 3:34 PM

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


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



by Nick Henfrey - Monday, 13 April 2015, 7:30 AM

Something that behaves like something else but is not really that thing


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


Master Agreement

by Nick Henfrey - Monday, 13 April 2015, 5:30 PM

When two parties execute a trade between themselves they specify the terms of the trade: Price, Volume, Location, timing etc.

But in order to successfully manage the trade's delivery and settlement a lot more information needs to be available than is captured in the trade details, such as when payment is due, who needs to notify a TSO etc.

This additional detail is held in a Master Agreement

Each trade that is executed is regulated by a Master Agreement


Master Agreements exist to cover various sorts of trade, for example the UK standard gas and power Master Agreements :

GTMA (Grid Trading Master Agreement) covers UK power trading, complete with all the details of notification

NBP97 (Short Term Flat NBP Trading Terms and Conditions Ref. NBP 1997) covers natural gas trading at the NBP complete with details of nomination

Master Agreements may reference other Master Agreements - ISDA for example is an organization that is aiming to offer master agreements that unify trading, for example at the NBP and at TTF

Master Agreements are themselves referenced by bilateral trading agreements, which are agreements set up by pairs of potential trading partners to specify which Master Agreements will be used for different products and instruments, and usually cover other arrangements such as netting, collateral etc.

Master Agreements may have schedules or annexes that define additional terms, or override terms in the main agreement

Bilateral Master Agreements may have additional schedules that define variations to the standardized master agreements

A Confirmation, as well as confirming the trade details, also confirms the master agreements that regulate the trade, and may itself contain exceptions or variations from the general bilateral terms






by Nick Henfrey - Monday, 13 April 2015, 5:34 PM

Netting is the aggregating and offsetting of multiple cash flows between counterparties to arrive at one, or a limited set of physical payments


There are two distinct sorts of netting:

Settlement Netting - which might also be described as payment netting

All cash flows between two parties are summed (receipts are positive, debits negative) to arrive at one physical payment due

Settlement Netting granularity aggregates cash flows to a single legal entity over one or  more cash flow attributes including:

  • Payment Date
  • Currency
  • Commodity (some times)

The exact terms of Settlement Netting are described in the bilateral Master Agreement that we have in place with the counterparty

Close-out netting - The set of outstanding cash flows that will be netted if our counterparty goes into receivership or liquidation

If we are expecting a payment of £999,999 from our counterparty, and they are expecting £1,000,000 from us, and they go into liquidation - we want to be owing them £1, not £1,000,000.

The liquidator will do his best for all creditors to try and get us to pay the £1,000,000, and have us wait in line with other creditors for the £999,999. Indeed without a legally sound close out netting agreement in place the liquidator would be favouring us as a creditor were they to let us net the outstanding payments



by Nick Henfrey - Monday, 13 April 2015, 5:35 PM

An electronic message sent to a third party detailing a transaction or requirement as part of a pre-existing agreement

Typically gas and power transactions are nominated to system and market operators


Examples of nominations:

Nominations are sent typically some time in advance, and then updated as any changes occur (new trades are executed, new forecasts are made etc.)

For power and gas there are deadlines for the last nominations for a delivery period - if nominations are missed then the trading organization may face large imbalance costs so:

Nominations are one of the most time-critical processes or capabilities of any trading organization 

In the UK nominations are officially known as Notifications - but the general term, nomination, is more usually used



by Nick Henfrey - Monday, 13 April 2015, 5:42 PM
At its simplest an energy option is an instrument that gives the buyer the right, but not the obligation, to buy, or to sell, a commodity at a specified price at some point in the future.
More complex options may be financially settled, the payout being dependent on some condition(s) being met, and varying with some observable value(s) at the time of exercise
There is usually a single non-refundable payment made by the buyer of the option (the holder) to the seller of the option (the writer) - this is the option premium
First, let's try and categorize the different types of options we'll come across, and then describe each in detail, starting with the simplest:
1. Vanilla options - so called because they are a standard "flavour", which may themselves be divided into:
a) Simple physical options - already briefly described above, these include European and American options
b) Financially settled options - these pay out if some measurable, usually a published index, meets some specified criteria. The payout varies with this or other measurables. This category includes Asian options
c) Simple combination options - not strictly different types of options, but traders frequently combine simple options to tailor risk and payout to their circumstances
2. Exotic options - in contrast to vanilla options, exotic options are non-standard, usually complex and are designed to offer, or conceal, a combination of characteristics
Let's look at the simpler types in more detail
Simple physical options
Simple physical options may be thought of as an option to execute a Forward Contract. Indeed, if the option is exercised it effectively becomes a Forward Contract
When the option is traded the following terms are agreed:
  • Whether the option buyer has the right to sell the commodity or buy it - that is whether the Forward would be a buy or sell:
    • An option to buy is a call option
    • An option to sell is a put option 
  • The price that the commodity will be bought or sold at - the strike price of the Forward Contract
  • The type of the option - which determines the exercise time or period, that is when the buyer of the option may exercise their right
    • A European option may be exercised at a specific date, specified at time of execution
    • An American option may be exercised at any time in a date range, specified at time of execution
  • It also follows that the Option terms must include all terms of the potential Forward Contract, that is delivery location, volume and timing

Financial options

Financial options pay out a cash amount if they are in the money - the cash payout usually being the difference between a fixed strike price, and some variable observable, usually the published price of a energy commodity or product

Spread options and options on swaps (swaptions) are types of financial options

Asian options are financial options which pay out on the average price of an underlier over the delivery period - assuming they are in the money



by Nick Henfrey - Monday, 13 April 2015, 5:44 PM

OTC - Over-The-Counter

Generally used to refer to any trade not executed with an Exchange


Over-The-Counter trades may be executed by a broker, or directly bilaterally between two parties. The resultant trade, whether brokered or not has the following characteristics:

The trade details may be anything the parties agree - compared to the standardized contracts offered on an Exchange

The agreed trade price is private to the parties - although either may report it to a market data service to increase price transparency

Delivery, settlement, and all credit risk is entirely between the two parties



by Nick Henfrey - Monday, 13 April 2015, 5:46 PM

Profit and Loss (P&L) is a finance and risk reporting term to describe the profitability of an individual trade, a book, a desk, or a company. Whilst the P&L of a company includes all activity, and costs (offices, staff etc.) the trading P&L is a measure of the profitability of a single, or a set of, trade(s)


P&L is a change in the value of something, or a set of things between two points in time

You will often hear people refer to the P&L of the trade in terms of its value - the value at any point in time is effectively the difference between the value at that point in time, and the value before the trade was executed. We usually refer to this as the Lifetime to Date P&L or LTD P&L

Often we are interested in the change in value, the P&L, from the start of the year, from the start of the month, or from the last valuation. These are respectively known as:

  • Year to Date P&L (YtD)
  • Month to Date P&L (MtD)
  • Change on day P&L (CoD or DtD) 

As an example, let's say we bought some shares in a company for £60, and a year later we sold them for £100, then it seems obvious that we made £40 profit, assuming there were no cost of buying the shares, or selling them, nor indeed any other costs directly associated with the buying or selling

From the trading point of view we have executed two deals, or trades. Let's now think a bit more about these two trades, and ask some further questions:
We know the P&L after both trades have been executed (£40) but:
  • What was the P&L after the first trade?
  • What was the P&L of each individual trade?
Before continuing we will align our example with a more normal energy trading example.
In general traders don't buy a commodity, and then sell it later because of the difficulty and cost of storing energy commodities - see Storage
In general traders enter into a Forward contract, that is to buy the shares at  fixed time in the future, at a fixed price
The other advantage of Forward contracts is that the trader can enter a Forward contract to sell, as well as buy, at some time in the future. This is known as taking a short - i.e. negative - position
In the first trade:
We enter into a Forward contract to buy an amount of shares for £60 in March 2018
In March 2018 we will give £60 to the seller of the shares. This is called the financial side or leg of the trade. It has a known cash value: £60
The seller will give us (he will deliver) the shares. We don't know what they will be worth then, but we can look up the current expected market value of the shares in March 2018, and see what they're worth - see MtM for the details. We call this marking to market, or MtM. Let's say we go online and the market value is £58, then at that time the P&L of the trade is minus £2, we have made a loss. Each day a new price is published we should revalue our trade, and this should continue until the shares are delivered. We have a long position in this share until we sell it. We say the trade has an unrealized P&L of minus £2. We say it is unrealized, because we still have the contract to buy the shares and their value (to us) will continue to vary until we receive them
We call this the physical side or leg (it's physical because it's not cash, even though the share certificates are electronic, we still call this physical)
After ten months we note that the market price has risen to £110, the trade has a P&L of £50, the current physical side value of £110 less the cash or financial side of £60. We say the trade has an unrealized P&L of £50
In March 2018, our seller delivers the trades, and we give the seller £60. We note that the market price has dropped to £100, the trade has a P&L of £40, the current physical side value of £100 less the cash or financial side of £60. We say the trade has an unrealized P&L of £40
We decide to immediately execute the second trade and sell the shares for £100, by then the spot price, and execute a sell transaction
Between the two trades we can say that the P&L is £40 and that it is now realized. We can say the P&L is realized based on three criteria:
In general, with derivatives, these criteria are usually not met simultaneously, and realization may be defined according to one or more of these criteria, and may be dependent on other criteria as well
We have said the P&L of the two trades is £40, but what is the P&L of each individual trade? There are two general ways to define this:
  1. Ignore the physical side of each trade, so the first trade has a P&L of minus £60, the second trade has a p&l of £100, between them the P&L is £40. We can use this method when we are sure that the position of both trades has been closed out (which is another way of saying that the two trades' net position is zero). This method is sometimes called realized cash flow because it only considers the value of the cash elements of the trades
  2. Retain the physical side of each trade, and continue to mark it to market for each trade. By this method the realized P&L on the day the second trade was executed was £40, and the P&L of the second trade is zero. If we use this method the P&L of each individual trade will continue to fluctuate for as long as we use it. This method is sometimes called Realized MtM
In general the first method is preferred because it is simpler, we may have to use the second method when we are not sure the position is entirely closed out, or we know some is, and some isn't.
if the first method sounds odd, think about buying and selling a house, once you've bought a house you're very interested in how much you paid for it, and how much it's currently worth. Once you sell it however, you're only really interested in the price you paid and the price you sold it. You have little real interest in the current price
P&L that may result in a cash flow in the future is often discounted back to present day value
We may refer to undiscounted, and discounted P&L


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