PJM Interconnection has requested rehearing of the Federal Energy Regulatory Commission order rejecting PJM’s proposed initial margin calculation methodology to mitigate risk in PJM’s Financial Transmission Rights Market.
Assessing Dynamic Portfolio Risk
PJM’s proposed Historical Simulation Model (HSIM) sets the initial margin or collateral amount by evaluating the pricing of an FTR Market participant’s entire portfolio to construct a probabilistic range of possible losses from that portfolio. This method provides a high level of certainty that any loss will not exceed the posted initial margin.
PJM’s December 2021 FTR Credit Requirement filing was the culmination of a robust stakeholder process, independent study, debate and endorsement by stakeholders. It proposed the adoption of the HSIM methodology to calculate minimum initial margin requirements at a 97% confidence interval. On Feb. 28, FERC rejected the proposed revisions to PJM’s FTR Credit Requirement as unsupported by the evidence contained in the filing. PJM continues to meet with its stakeholders on a path forward to adopt the HSIM methodology.
Risk Management Reform
PJM’s proposed revisions to the FTR Credit Requirement, including the adoption of the initial margin methodology, are part of the ongoing comprehensive credit reforms by PJM and its stakeholders in a multi-year effort to adequately protect market participants from the financial consequences of default by strengthening market participant credit requirements and risk management practices.
Since 2019, enhancements approved by FERC include:
- Improving PJM’s ability to implement know-your-customer best practices
- Accelerating demand for collateral call payments
- Enhancing material adverse-change language
- Implementing industry-specific financial risk models
- Requiring audited financials
- Limiting or suspending participants from market participation
- Identifying and protecting against unreasonable credit risk
The PJM filing of March 30 requests rehearing and clarification of concerns expressed by FERC in the Feb. 28 FERC order.