Contract Refusal Contract Refusal is a process associated with participant’s ex-ante trading behaviour; It relates to how the Traded Not Delivered element is included in a Participant’s Required Credit Cover amount; Traded Not Delivered is calculated from a Participant’s ex-ante trading and takes account of the impact of any sales / purchases with a SEM NEMO on imbalance risk; For purchases, it reduces a Participant’s RCC while for sales it increases it; For sellers in the ex-ante markets, they need to have collateral posted with SEMO to meet potential non-delivery of their sales;

Contract Refusal Where RCC is above Posted Credit Cover, a Credit Cover Increase notice is applied; Under the Code’s current drafting, when a CCIN is applied – A participant must react within two working days before suspension processes begin; A participant must react within the Response Period (a period of 5 continuous hours within a working day) before SEMO would begin start to refuse notification of further ex-ante contracts from SEM NEMOs relating to this participant; Intent of this is to limit any additional risk being amassed in the event that the CCIN is not acted on;

Contract Refusal Final design of Contract Refusal process was only finalised during the consultation process in early 2017; By this time, imbalance settlement systems were already in build phase; View from vendor was that applying this change would negatively impact on implementation timelines; SEMO undertook an impact assessment to assess if a manual workaround could be applied; Found that this would also need support IT systems to be procured and developed; Resulting view that this functionality will be delivered as a “Day 2” change

Contract Refusal Impact of non-implementation – If a CCIN is not acted upon within the first 5 consecutive hours, additional sales will continue to be accepted, potentially increasing the non-delivery risk; However, the application of the Response Period means that SEMO can take no action potentially for up to one working day after the issue of a CCIN (e.g., if a CCIN is issued after the 12 noon credit check, the 5 continuous working hours starts at 9AM the following morning and does not expire until 4PM); As a result, the additional risk is one extra day before SEMO begins the suspension process; Once participants put in place the Required Credit Cover that reflects their normal trading pattern, likelihood of a CCIN driven by the Traded Not Delivered element is minimised;

Credit Cover Increase Notice 1st Working Day 2nd Working Day Credit Cover Report published containing CCIN value Three credit assessments daily 17:00 17:00 17:00 There are three credit assessments run daily Where there is insufficient credit cover, a Credit Cover Increase Notice applies A participant must remedy this within 2 working days At any stage within the 2 Working Days a Participant can: Submit increased collateral Pay Bill(s) (before due date if necessary) Use ex-ante markets to offset volumes If a CCIN is not remedied by 17:00 2WD, Participant in Default & will be Suspended from the Market