"The principal benefit of adapting new and existing contracts to the same format is that trading partners will more easily be able to utilise the multi-lateral platforms' ability to net out overlapping credit obligations," said Nicole Daggs, an attorney at US energy company Mirant - one of the CCRO's 32 member firms. "Multi-lateral clearing could result in significant reductions in collateral requirements."
The recommended novation - transfer of credit risk to a clearing house - agreement is standardised in that it provides a consistent contractual framework that can be modified as required, the CCRO added.
In November, the committee released best-practice recommendations for the governance, valuation, credit risk management and disclosure of merchant energy and trading activities. It is also currently developing guidance for energy market price indexes and evaluating methodologies for assessing the capital required to build and sustain a viable merchant energy business, following the sector’s meltdown last year.