PJM on Tuesday presented the first of several papers expected to be developed for the Financial Risk Mitigation Senior Task Force, which is studying potential rule changes to manage risk in the Financial Transmission Rights Market.
“Enduring Governance of PJM’s Financial Markets” reviews recommendations regarding PJM’s existing stakeholder process and recommended improvements to PJM’s internal risk management-related capabilities, as well as improvements to its credit policies and market rules.
That report examined the June 2018 default of a financial transmission rights trader in the PJM FTR Market. In part, it recommended PJM revisit its stakeholder process with an eye toward facilitating the flow of information from members to PJM regarding advances in financial market policies and procedures.
The stakeholder process-related suggestions follow two themes: the qualifications of participants and their voting eligibility, and streamlining and elevating the stakeholder body in addressing critical financial markets issues.
PJM translates the full adoption of the report’s recommendation on this issue to the creation of a new senior standing committee, which would focus on all financial market matters and report directly to the Members Committee. Voting members would be required to have professional experience in the relevant subject matter, and voting would be sector-weighted.
The second paper, “FTR Default Allocation and Central Counter-Party,” explores the allocation of potential defaulting participant shortfalls in the Financial Transmission Rights Market.
The paper also allows for the possibility of a separate counter party, exclusive to the FTR Market, which would manage credit rules and restrict risk only to FTR Market participants.
In the current market design, default risk is socialized among all PJM members. The paper concludes that for reasons of equity, there is a strong case for isolating FTR credit risk so that FTR participants alone bear any burden of possible default.
Also at the meeting, PJM presented an “FTR Market Analysis for Financial Risk Mitigation.”
The analysis contains potential recommendations for mitigating risk in the FTR Market through:
- Implementing a rolling monthly auction
- Aligning FTR “biddable points” with the day-ahead and real-time transactions of physical energy
- Exploring the existing capabilities and potential enhancements of FTR software
PJM will follow up with detailed proposals for market reform at the July 17 meeting of the task force. The Financial Risk Mitigation Senior Task Force is charged with identifying market rule changes and either implementing the rule changes or devising a plan for their implementation before the December meeting of the Board of Managers