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What You Should Know About Calculating FTR Risk

Have you started looking into trading Financial Transmission Rights (FTRs) and are wondering what you need to know to get started?  

FTR transactions are a unique asset class and, as such, have a unique approach to risk management. This post explores challenges relating to calculating FTR risk metrics, and how Yes Energy® can help.

Challenges of Calculating FTR Risk

FTRs are an illiquid product—being traded sometimes only a handful of times in one year in ISO run auctions. These auctions are effectively the only source of price curves available, which leads to a lack of price points to do a traditional VaR calculation.

In order to calculate FTR Risk, you need to use a proxy to calculate a useful risk metric. Finding an effective proxy can be a challenge, especially for a significant historical lookback time period. At Yes Energy, one of the ways we support our clients is with access to terabytes of historical data dating all the way back to the markets’ inception. 

Independent System Operator (ISO) Requirement

With the Federal Energy Regulatory Commission (FERC) Order 741/741A several years ago, it became a requirement to measure risk on your FTR positions. Each year, an officer of your company needs to certify that you have an effective risk policy, which includes quantifying the risk of your FTR portfolio.

For example, in PJM’s Credit Policy, they require that you calculate risk on your FTR positions on no less than a weekly basis. The guidelines provided by PJM related to this risk calculation are that it “engages in a probabilistic assessment of the hypothetical risk of such positions using analytically based methodologies, predicated on the use of industry accepted valuation methodologies.”

"The guidelines provided by PJM related to this risk calculation are that it 'engages in a probabilistic assessment of the hypothetical risk of such positions using analytically based methodologies, predicated on the use of industry accepted valuation methodologies.'”


Independent Calculation of FTR Risk

Depending on the maturity of your organization, you may be relying on a manual risk calculation in a spreadsheet. This comes with the potential that your figures are incorrect. This could be caused by human error, or have even been known to occur due to manipulative behavior (i.e., to hide positions or risk usage). 

If you were transacting exchange traded futures and options, these risks would be 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 initial margin—a measurement of market risk.

Within most of the ISO markets, this “initial margin” requirement does not exist, leaving you to measure your FTR risk without an independent source.

Data Management

In order to support calculating FTR risk 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 evaluate risk on 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 risk calculations is critical to ensure accurate values.  
  • 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 do risk calculations. A recent example of this was the new PJM Peak Types that were added in 2022. Challenges included: how to calculate risk on old peak types after they were retired and how to calculate risk on new peak types as they were introduced.

At Yes Energy, we have a team dedicated to proactively monitoring each market for new datasets or data changes that will impact you. If an ISO is changing report formats, website links, or fails to report data, you’ll be the first to know.

Yes Energy Can Help!

Yes Energy’s 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 industry standard FTR risk methodology you can be confident you are getting accurate values for your reporting and ISO certification 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.


Figure 1: Position Management FTR VaR (Value at Risk) chart

The Position Management FTR risk calculations are intended to provide the following:

  • Industry standard risk metrics to manage your FTR positions and meet internal Risk Policy requirements
  • ISO requirements to have risk measurement of open FTR transactions

The system allows you to customize your risk metric calculations and seamlessly integrate them in your downstream process. You can:

  • Define custom confidence internals, lookback time periods, seasonality, and more
  • Easily drill down into the underlying data to quickly identify what is driving your risk calculations
  • Directly integrate data into your global risk reporting using API endpoint or Snowflake functions

With Position Management, you have an independent source of FTR risk calculations, lowering the risk of manual mistakes or interference in your risk management processes. The foundation of these risk calculations is Yes Energy’s data management activities, which include trade capture, price capture, model remappings, and inevitable ISO changes.

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

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Yes Energy allows you to easily and efficiently assess the risk of your FTR positions. Stay on top of ever-changing market trends with a partner who’s focused exclusively on helping you navigate the complex U.S. power grid. 

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