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As we understand your inquiry, Entity A would sell to Entity B a product that would obligate Entity A to post margin as an agent for Entity B when forward prices for PJM exceeded a certain threshold. As you have described the product, the product applies for BGS obligations only and not for a wider range of trading obligations. Further, it applies to BGS load won in auctions already held and ruled upon by the BPU.
There is no issue at all, with respect to BGS certifications that have been made, with the two entities transacting such a product that relate to positions won in past auctions once the Supplier Master Agreements have been signed for the relevant supply period. Your concern is whether entering into such a transaction could make it difficult for Entity A or Entity B to make the certifications required to participate in future BGS Auctions. We can provide the following guidance on that issue, assuming that the certifications approved for future BGS Auctions are substantially the same as the certifications used in past BGS Auctions.
Without going through each certification in detail, an entity will generally be required to certify in future auctions that the entity has no bidding agreements, no knowledge of another bidder’s bidding strategy, no knowledge of another bidder’s preference for bidding on any product, or no knowledge of another bidder’s valuation of any product in the upcoming auction. You will also be required to certify that you have not revealed any such information to anyone, including another bidder. It does not seem that selling the product you describe at this time, related only to past BGS obligations, would create any type of bidding arrangement for a future auction, would reveal confidential information with respect to bidding strategy, would reveal either entity’s valuation of the BGS product for future auctions, or would reveal an entity’s preference for bidding on any specific product. Hence, it would not seem that if Entity A and Entity B at this time entered into this contingent credit sleeve arrangement, that the transaction would not have any impact on the certifications to be made for future auctions.
Our response does not contemplate, and would not necessarily apply, to a situation in which Entity A and Entity B entered into a general corporate agreement where Entity A would be supporting all of Entity B’s trading obligations. Similarly, we are assuming that the arrangement is not a transaction that would entail Entity A conducting due diligence with respect to Entity B’s trading operations, or BGS supply arrangements, or valuations (and vice versa). Further, we are assuming, as you have stated, that this credit product is not for the purposes of bidding in future BGS auctions. Were any of these assumptions to be incorrect, the guidance we are providing could differ as the level of knowledge that each entity may have about the other’s valuation methods and preferences could make it difficult to make some of the required certifications. However, trading a contingent credit sleeve on a one time basis, without a review of the other entity’s trading strategies and BGS hedging and supply arrangements, does not in itself appear to pose any problem for future auctions. Finally, we note that the transaction you describe would not "make" one entity a financial institution for the other, and that any provisions for additional information to be provided to a financial institution under the Association and Confidential Information Rules would not apply to the circumstance described.
8/11/2009, in
Association and Confidential Information Rules, Credit.
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