Cost Evaluation of Credit Risk Securitization in the Electricity Industry: Credit Default Acceptance vs. Margining Costs
Institutions such as the European Commission (EC) are currently seeking to increase the transparency of the derivatives markets. This course of action includes in particular the installation of a centralized clearing entity and with this the obligation to clear all relevant financial derivatives. Besides the expected securitization of the financial system, these steps would also significantly influence the electricity industry, as most of the commodity trading in this sector is currently still done in the largely non-cleared OTC markets. Despite the fact that clearing of the OTC contracts in this sector has significantly increased over the last years, credit risk mitigation is still largely effected with bilateral netting agreements, standardized contracts and individual trading limits between partners. This paper explores the impact of margining on the financial costs in comparison to the direct management and the intentional acceptance of credit risk. For this purpose, the losses due to defaulting business partners in the electricity industry are compared with the interest requirements of the cash reserve for an assumed margining account. The results show that for an asset-backed utility, depending on the price trajectory, the cost of margining may significantly outreach the costs stemming from the acceptance of credit risk.
|Date of creation:||Sep 2010|
|Date of revision:||May 2011|
|Contact details of provider:|| Web page: http://www.eonerc.rwth-aachen.de/fcn|
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Harmsen - van Hout, Marjolein J.W. & Dellaert, Benedict G.C. & Herings, P. Jean-Jacques, 2010.
"Behavioral Effects in Individual Decisions of Network Formation: Complexity Reduces Payoff Orientation and Social Preferences,"
FCN Working Papers
5/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
- Harmsen-van Hout, Marjolein J.W. & Dellaert, Benedict G.C. & Herings, P. Jean-Jacques, 2008. "Behavorial Effects in Individual Decisions of Network Formation," Research Memorandum 019, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- Harmsen - van Hout, Marjolein J.W. & Herings, P. Jean-Jacques & Dellaert ,Benedict G.C., 2006.
"The Structure of Online Consumer Communication Networks,"
028, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- Harmsen - van Hout, Marjolein J.W. & Herings, P. Jean-Jacques & Dellaert, Benedict G.C., 2010. "The Structure of Online Consumer Communication Networks," FCN Working Papers 3/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
When requesting a correction, please mention this item's handle: RePEc:ris:fcnwpa:2010_013. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Hendrik Schmitz)
If references are entirely missing, you can add them using this form.