1. Commodities Exchange Act Market Participant Criteria and Attestation Mark Ruane ERCOT Vice President of Credit and Enterprise Risk Management CWG/MCWG August 5 th 2011 ERCOT Public

2. 2 Market Participant Eligibility Criteria An expected condition for a Commodity Exchange Act exemption will be the institution of market participant eligibility criteria. ERCOT proposals will be broadly in line with those of put forward by other ISOs/RTOs. Key Components: Annual management attestation –Expertise in risk management and ISO/RTO markets –Ability to respond to ISO/RTO direction Capitalization requirements Risk management capability verification August 5 th 2011CWG/MCWG

3. 3 Market Participant Eligibility Criteria Annual Management attestation –Annual certification by an appropriate Officer of Market Participant Due initially after date of approval of the exemption, and by April 30 th annually thereafter, in connection with issuance of annual financials Failure to provide would lead to exclusion from markets Required for all Counter-Parties Management attestation contents –Expertise in risk management and RTO/ISO markets Appropriate training –Ability to respond to ISO/RTO direction Internal controls and processes August 5 th 2011CWG/MCWG

4. 4 Market Participant Eligibility Criteria Management attestation contents (cont.) –Sufficiency of risk management capabilities Demonstrate comprehensive risk management framework applicable to the markets in which Market Participant transacts. Evidenced by: –Risk policies –Procedures and internal controls –Delegations of Authority –Independent risk management function Other ISOs/RTOs have proposed requirements for weekly probabilistic assessment of CRR positions. Most require identification and documentation of the risks to which the Market Participant is exposed. FERC appears to favor submission of a narrative describing risk management capabilities. August 5 th 2011CWG/MCWG

5. 5 Market Participant Eligibility Criteria Capitalization Requirements –Asset and net worth tests –Limits originate in Commodity Exchange Act ‘Eligible Contract Participant’ definition §1.a(18) –Other requirements Participation Collateral will be required if limits are not met –Participation Collateral will not be available for other purposes (e.g. will not be available to cover TPE requirements) –Participation Collateral must be held by ERCOT and for ERCOT’s sole benefit Capitalization requirements may be met by an acceptable guarantor August 5 th 2011 CWG/MCWG

6. 6 Market Participant Eligibility Criteria Draft Capitalization Requirements August 5 th 2011CWG/MCWG

7. 7 Market Participant Eligibility Criteria ERCOT may require Participation Collateral to be posted in certain instances, such as: –Prospective Counter-Parties or Counter-Parties with six months or less experience in ERCOT markets –Qualified audit opinion –Material civil or criminal litigation –Credit watch with negative outlook –Material quarterly or annual losses –Bankruptcy, dissolution, merger or acquisition –Material adverse changes in market indicators of risk, eg CDS prices August 5 th 2011CWG/MCWG

8. 8 Market Participant Eligibility Criteria Risk Management Capability Verification –All CRR Market Participants will be asked to supply risk management policies, procedures, controls, reports etc. for review and respond to requests for additional information, as needed. –Mandatory verification of capabilities based on some level of position size and risk –Discretionary verification of other participants –Materials due five business days after request –Verification may be contracted to a third party Potential fee –Participation in markets conditioned on notification of acceptance of documentation supplied August 5 th 2011CWG/MCWG

9. 9 Questions August 5 th 2011CWG/MCWG