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The Challenges of Mark-to-Market for FTR Positions

Have you started looking into trading Financial Transmission Rights (FTRs) and are wondering what you need to know to get started? FTRs are a unique financial contract. Unlike exchange-traded futures and option contracts, there is a lot of work that goes into the post-trade processes, especially mark-to-market calculations.  

In this post we are going to explore challenges relating to marking-to-market your FTR positions, and how Yes Energy® can help.

Independent System Operator (ISO) Requirement

With Federal Energy Regulatory Commission (FERC) Order 741/741A several years ago, it became a requirement for you to mark-to-market your FTR positions. Each year, an officer of your company needs to certify that they have an effective Risk Policy, which includes mark-to-market valuation of your FTR portfolio.  

For example, in PJM’s Credit Policy, they require that you value (mark-to-market) your FTR positions on no less than a weekly basis.  

"Each year, an officer of your company needs to certify that they have an effective Risk Policy, which includes mark-to-market valuation of your FTR portfolio."

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Financial Statement Requirement

If you are doing mark-to-market accounting, you also need to mark your FTR positions to market. This is a required input for your financial statements to calculate unrealized P&L for your Revenue or Other Comprehensive Income (OCI) categories.

Independent Valuation of FTR Positions

Depending on the maturity of your organization, you may be marking your books internally. This comes with a certain amount of risk that your figures are incorrect. These risks could be system related, human error related, or has even been known to occur due to manipulative behavior (i.e., to hide losses or manipulate bonus payouts).  

If you were transacting exchange traded futures and options, these risks would be very low.  That is because those transactions are cleared through a Futures Commission Merchant (FCM), sometimes known as a “Clearing Agent.” These FCMs produce statements each business day, which include valuation of open positions. Fund Administrators, Auditors, and Investors are used to seeing this independent third party mark-to-market valuation to mitigate these risks.

With the ISO markets, this independent, third party FCM does not exist, which increases the risk that the number being reported on your financial statements is incorrect.  

Data Management

In order to support doing mark-to-market valuation internally there is a fair amount of data management that your company needs to support. This includes:

  • Trade Capture
    • Unlike exchange traded futures and options, there isn’t a single source of truth for these trades. In the US wholesale markets, there are seven ISOs that provide FTR transactions, with seven different interfaces and file types.
    • You also need a plan of how to convert multi month periods to monthly buckets to effectively mark-to-market your portfolio.
  • Model Remappings
    • ISO markets often remap one node to another. These occur in cases where a node is de-energized, for example. That means you may own an FTR contract with a source or sink node that is no longer traded. Making sure that you can map these to the new node definition when doing mark-to-market valuations is critical to ensure accurate mark-to-market values.  
  • ERCOT Options
    • ERCOT currently does not publish option price curves. These need to be derived from the market results file from each auction.  
    • Some auctions include various start and end dates, leading to some months being priced and others not being priced.
    • You need a way to calculate a complete forward curve when given incomplete information.
  • ISO Changes
    • The ISOs can change technology requirements. Some recent examples of this were MISO MUI 2.0 and PJM’s digital certificate requirement. If you have internal processes built to communicate with the ISOs to capture your trades and price curves, you need to make updates to ensure your process is not interrupted.
    • The ISOs can also make more foundational changes that impact your ability to capture trades and mark them to market. A recent example of this was the new PJM Peak Types that were added in 2022. Challenges included: how to mark-to-market old peak types after they were retired and how to ensure new peak types were captured properly for future Position, P&L, and Risk reporting.  

Yes Energy Can Help!

Our Position Management™ solution provides the nodal power market Middle Office with a turnkey, consolidated solution for oversight of your trading activities. Yes Energy handles the deal capture of your FTR portfolios, and using our industry standard mark-to-market methodology—which is used by some of the largest FTR firms—you can be confident you are getting accurate values for your accounting and reporting needs. This is all delivered to your team through automated email reporting, a visual Middle Office dashboard (Figure 1), and easy to integrate data API.

PosMan Blog

Figure 1: Position Management Open Profit (mark-to-market) chart

This is intended to meet the following needs for our customers:

  • ISO requirements to have periodic valuation of open FTR transactions
  • Source of unrealized gains and losses to record on your financial statements
  • Provide an independent source of FTR mark-to-market valuations for Fund Administrators, Auditors, or Investors

With Position Management, you can outsource expensive data management, including trade capture, model remappings, ERCOT option price curve logic, and inevitable ISO changes.

Click here to learn more about Position Management today, or schedule a demo!

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