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PRE-TRADE RISK MANAGEMENT


Pre-Trade Risk Checking Trayport’s Energy Market Access Gateway allows


GCMs / Prime Brokers / Trading Firms Risk Manager’s the ability to manage the firm’s access with pre- trade limits to the European energy marketplaces in real-time. Pre-determined constraints for each firm by instrument or group of instruments ensures firms never breach position limits and are constrained by their cash and P&L exposure. Trayport has built a risk system that allows risk managers to establish more intelligent relationships between associated contracts, allowing for tighter overall limits to be set, whilst allowing the trading firm to operate more effectively within higher individual product class and/or tenor limits in the specific segments of the market that they are targeting. This provides increased flexibility and the capacity to potentially trade larger volumes than possible without this design.


How it Works


• The GCM, Prime Broker or Trading Firm Risk Manager’s set up firm details, risk profiles and constraints on a central EMAG Risk Manager server.


• A firm uses a local Trayport Trading Gateway to access the market and the central risk manager


server passes all constraints to a local risk server directly connected to the trading firm’s Trading Gateway.


• Firm’s Trading Gateways are configured to make one connection to the approved risk manager


server for the markets they are permitted to access.


• Any orders submitted are pre-checked by the risk manager server. Only authorised trades within


the risk constraint limits are allowed to get to the marketplace.


• Any orders matched on an exchange or electronically on a broker are pre-checked by the


risk manager server.


• If limits are exceeded; clients will only be able to reduce their position and the risk.


• Access can be disabled in real-time preventing any further actions by the trader.


Access to the following markets via Trayport’s Trading GatewaySM


, with risk enabled limits: * APX * Bayerische Borse * BlueNext * Borsa


Italiana IDEX CEGH * CIMD * EEX * Endex * Evolution * Fluxys * GFI Group Ginga * GlobalCOAL * Global Commodities * Green Exchange * HUPX ICAP * ICE Futures * INTL FCStone * Marex Spectron * NASDAQ OMX NordPool Gas * OMIP * OTCex * Powernext * PXE * SSY * Tradition Tullett Prebon *


developed in close consultation with exchanges, brokers and GCMs to address the lack of pre-trade risk controls in the European energy markets. It allows Prime Brokers and GCMs the ability to offer direct market access to companies (under exchange membership in the case of the GCM, or in the name of a Prime Broker for the OTC markets) which could not previously trade. EMAG is designed to be a flexible, scalable risk


management system which is fully electronic and automated to ensure only pre-checked orders are sent to an electronic OTC venue or exchange. In so doing, EMAG is anticipated to dramatically increase the accessible market for participants in allowing Prime Brokers and GCMs to offer market access to those trading firms which may not have previously traded in European energy markets (due to the lack of available pro-active risk management controls) or for those needing risk controls in place in order to continue with existing connectivity. Trayport’s EMAG solution for the European energy


trading community is the culmination of a realisation of the challenges presented by new regulations and the needs of the energy trading community to reduce capital requirements. EMAG’s evolution is the culmination of close consultation with the industry and regulators to establish exactly what is needed and represents an industry driven initiative to solve an industry wide problem. James Davies, Head of Sales at Trayport, explains


it like this; “Improving access and developing energy markets are important goals for us. Risk management in commodities trading has historically focused on post- trade risk, often occurring well after the trade. This emphasis has now changed. To effectively meet expected regulatory and financial risk management obligations, credit providers are now focusing on pre-trade risk”. The outcome of implementing the EMAG pre-trade


risk control software across the board is expected to lead to increased participation in energy markets, and as a consequence more liquidity, better spreads and higher trading volumes. “The market has been asking for a pre-trade risk


system that will allow them to trade within flexible risk constraints. We have been in discussions with a number of market participants to ensure that the system surpasses their needs – giving them confidence to grow their businesses, simplify market access and robustly control their credit exposure. Further this will allow better use of capital and the introduction of a more risk centred view of trading,” adds Davies.


Summary When G20 leaders set the broad reform agenda to


reduce systemic risk and increase transparency in the OTC derivatives markets they might not have fully appreciated the complex nature of the instruments they were dealing with – and especially in the power and gas industries.


40 December 2012


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