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Frequently Asked Questions - #77

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Entity A is contemplating selling a hybrid swap/credit-support product to Entity B, akin to a contingent credit sleeve.  Entity A and Entity B are each a BGS Supplier.  It is possible that each intends to bid in the next auction; however, these entities have not and do not intend to discuss with each other participation in future auctions.  Further, Entity A and Entity B are not related entities, always bid separately, and have no agreements related to bidding in the auctions in any way. 

The transaction can be described as follows.  Entity B would pay Entity A a premium in exchange for Entity A standing ready and posting cash or a letter of credit directly to the EDC (not Entity B) if the PJM forward energy price exceeded a particular threshold.  This would assist Entity B to meet its credit obligations under an existing Supplier Master Agreement. 

This "contingent credit sleeve" product is negotiated after the close and certification of the results of the last BGS Auctions, and before the beginning of the next BGS Auction cycle.  This product is not for the purposes of bidding in future BGS Auctions.  Are there any issues with such a transaction under the Association and Confidential Information Rules?

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, 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 also 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.   

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, in the particular timeframe you describe, 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 seem that if Entity A and Entity B entered into this contingent credit sleeve arrangement in the timeframe you describe, the transaction would not have an 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.

11/15/2021, in Association and Confidential Information Rules.

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