Detailed Glossary of Energy Trading terms

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

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

Detail

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

A financial side or leg of a trade that is not fixed in advance, but is dependent on the value of some observable (usually an index) at a pre-agreed time related to the delivery date

Detail

Most trades involve at least two legs or sides, in a straightforward physical Forward contract one side is the physical delivery of the commodity, the other is the cash payment in settlement of the commodity delivered

In an indexed forward, or floating forward, the cash side is not fixed in advance, but related to an index (usually published daily), and generally fixed in daily or monthly either at the daily price or the average of the daily-published monthly price

A Forward, or Forward Contract, is an agreement to buy or sell a commodity at a fixed time in the future

Details

A Forward Contract involves two trading parties: a buyer and a seller. Our organization is one party, the other is the counterparty

A Forward Contract can involve almost any terms for quantity (Volume), quality, commodity, delivery period, delivery location, pricing and settlement

A Forward Contract may be executed directly with a counterparty, or through an intermediary (a broker)

Whether brokered or not, responsibility for delivery and settlement of a Forward Contract is usually directly with the counterparty (see Clearing for an exception)

Forward Contracts may be executed at a fixed price, or at a floating price:

• Fixed Price Forwards are settled at a strike price which is agreed as part of the trade
• Floating Price Forwards (Floating Forwards or Indexed Forwards) are settled at a price which is derived from a published index, or a combination of indices according to a pre-agreed formula

Forward contracts may be physically or financially settled:

• A physically settled Forward requires the seller to deliver the physical commodity at the time and place specified in the terms of the trade, the buyer is required to pay for the commodity at the price and time agreed in the terms of the trade
• A financially settled Forward requires the buyer and seller to compare the agreed strike price with an agreed valuation of the commodity at the time of delivery. If the strike price is higher than the valuation price then the buyer pays the seller the difference in price (per unit of the trade volume), otherwise the seller pays the buyer

A financially settled Forward is often referred to as a swap

A Forward is usually settled bilaterally between parties.

Forwards may be included in a netting agreement

Forwards may be included in a margining agreement

A Forward may be given up for clearing

The earliest tradable month of a particular contract - normally a Futures contract

Detail

It's easiest to give an example:

A March monthly contract may be tradable up to the 25th of February

On 25th February the Front Month would be March

On the 26th February the Front Month would be April 

Contracts beyond the Front Month are sometimes called Back Months

A Futures Contract is an agreement to buy or sell a commodity at a fixed time in the future executed on or with an Exchange

Detail

Note the similarity in description to a Forward Contract

We will focus mainly on the differences

Exchanges list standardized products that may be traded. A product describes a standardized commodity, delivery period and delivery location that may be traded

Exchanges list a buy and a sell price for every different product they list. These buy and sell prices are provided by Market Makers

Futures Contracts are always cleared

Futures Contracts may be physically or financially settled

A financially settled futures contract may be taken into the delivery period, and is settled by daily margining at the daily fixed in price

If you're wondering how that is different to an exchange-traded swap - then the difference is a swap is very like a financially settled futures contract, but the swap is generally not daily margined