EnergyClear and Vmac to develop clearing function

Houston-based, industry-owned energy derivatives clearing house EnergyClear Corporation has entered into a letter of intent with New York-based credit risk assurance provider Virtual Markets Assurance Corporation (Vmac) to develop a program linking Vmac's 'AAA'-rated credit assurance program to EnergyClear's clearing house functions.

Dennis Earle, president of EnergyClear, said the two companies intend to develop a seamless program that would provide significantly increased credit protection for energy trading from contract initiation through to delivery for both standard and structured over-the-counter contracts.

At present, EnergyClear, which formally launched this month, can only provide clearing functions for standard OTC products. EnergyClear currently clears monthly forward contracts for 12 power and 22 natural gas points.

But Vmac said it can provide an alternative to the traditional clearing house structure operated by EnergyClear by becoming a guarantor of bilateral contracts. Its model has already received approval from one major energy derivatives participant. TradeSpark, Cantor Fitzgerald’s online energy trading platform, is using Vmac’s model during its testing phase, which started in August.

“The clearing product is important to the efficiency of the energy market since capital is very expensive in this sector,” said Wallace Turbeville, Vmac chief executive and a former Goldman Sachs energy trader. “Since clearing allows for multilateral netting of risks, it can reduce the demand for capital by between 80% and 90%," Turbeville added. In the energy market, many firms are raising capital at very high cost and reducing trading activity to lower perceived risk. Clearing is a far better way to address this issue.”

Vmac, which is part-owned by AAA-rated monoline insurer Financial Security Assurance (FSA), aggregates contract obligations that are guaranteed by FSA up to an agreed value, which is marked-to-market over time. While bonds are not issued, as the obligations are unfunded, the effect is similar. FSA also syndicates the risk into the reinsurance and credit derivatives markets.