2. Standardization in OTC Clearance and Settlement February 25, 2004 Holly Arney: Chief Risk Officer Actuarials Exchange Return to Risk Limited website: www.RiskLimited.comwww.RiskLimited.com

3. Standardization in Energy: Finding Hidden Risk Four major areas of current risks: Industry / Regulatory Risk Legal / Contract Risk Operational Risk Default Risk

4. Regulatory Risk: Credit Stress in the Energy Industry – The Problem Indictments continue, but appear to be winding down Continued Stressors in the industry hitting Wall Street Targets and Layoffs FERC, CFTC, DOE, DOJ and SEC are looking at ways to prevent future crises Continued unstable regulatory environment + Reliability Standards and Must Run Standards + Consumer Protections + Energy Bill + Customer Protections

5. Regulatory Risk: The Senate Energy Bill Ensures reliable and affordable electricity, repeals antiquated laws that have cost consumers billions of dollars and prohibit onerous federal meddling that could cost consumers billions of dollars more. It increases penalties for market manipulation and enhance (sic) consumer protections. Title 12, Overview of Senate Energy Bill 2004

6. Creating Terra Firma Creating reliable wholesale prices for NG and Electricity Educating the Public – Market Supply and Demand Ensuring a secure supply of commodities by encouraging development

7. Update: Clearing Clearing Competition – still Nascent Not Favored by Exchanges / Clearinghouses Favored by End-User Eurex and new entrants to the market Setting Sane Limits On the formation of multi-exchange and clearinghouse efforts Issues Size of Market Assumption of Obligations in multi-exchange What legal recourse is there in a default event? Assigning Rights

8. Cost Effectiveness: Alternatives Clearing Mutualization Least Expensive Nascent Bilateral Netting (MNA) Limited Amounts Lack of Standardization Little Risk Diversification Bilateral Cross-Commodity Netting Increased benefit to a degree Standardization Issues Holding the Risk

9. Standardized Clearing Rules & By-Laws Procedures Decision Makers Recourse (arbitration or other legal redress) Margining Initial Margin Variation / Daily / Pass-through Margin Setting Sensible Levels Confidence Levels Time Methodology Setting Product Limits & Guarantee Fund

10. Physical Default Peculiarities The philosophy of commodities Standard Wholesale Time Sensitivity Transmission & Bottlenecks Price Transparency & Replacement Cost 5000% or more Standard Market Design – the holy grail 2006

11. Further Questions: holly.arney@actuarials.com