FRMSTF Recommendations Dashboard

The Financial Risk Mitigation Senior Task Force (FRMSTF) dashboard is a webpage designed to assist stakeholders in correlating the recommendations included in the Report of the Independent Consultants on the GreenHat Default against the activities and progress of the workstreams. Information will be updated regularly coinciding with the FRMSTF publication schedule and work plan.

Recommendations

A) Advance Credit/Collateral Best Practices into the Tariff
1. The PJM Credit Policy Failed to Address Critical Risks
ID Recommended Actions Work Stream Progress Completed
A1 Use the mark to auction values established in the more frequent auctions (see recommendation F) as the basis for “variation margin,” 13 charging as a current debt the value erosion between the purchase price and the current market value as determined by the latest auction. Credit and Risk Management/Models A discussion paper examining variation margining and how it could work for the FTR market, as well as other settlement options in the period following an FTR auction was presented at the 7.17.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Financial Market Reform Project Discussion Paper – Variation Margin and Post Auction Settlement  
A1.1 This will help to capture the credit risk for all FTRs, not just near term FTRs, and reduce the current volatility of margining due to infrequent auctions. Credit and Risk Management/Models A discussion paper providing an overview of variation margining and post auction settlement was presented at the A report on Position and Concentration Limit options was presented at the 7.17.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Financial Market Reform Project Discussion Paper – Variation Margin and Post Auction Settlement   
A2 Retain the current 10¢/MWh minimum charge, in addition to purchase price, as a form of “original margin” 15 until such time as more precise measurements become available to determine original margin. Credit and Risk Management/Models    
A3 Eliminate the FTR undiversified adder because it is uncorrelated to market risk. Credit and Risk Management/Models    
A4 Define a default as any participant that is unable to meet a monthly variation margin call within two business days. Credit and Risk Management/Models A discussion paper addressing default and termination events was presented at the 9.5.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Events of Default and Market Participation Termination.   
A4.1 Require that the default be declared promptly and without negotiation. Credit and Risk Management/Models A discussion paper addressing default and termination events was presented at the 9.5.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Events of Default and Market Participation Termination.   


B) Clarify the Role of PJM as Manager of Risk in Financial Markets
2. PJM Did Not Take Robust Policy Actions Following Precedent Experience
5. PJM Surrendered an Early Opportunity to Stop or Restrain GreenHat
ID Recommended Actions Work Stream Progress Completed
B1 PJM should revisit its existing stakeholder process to better facilitate member-to-PJM directions on advances in financial market policies and procedures. Stakeholder Process Changes/Governance Please see B1.1-1.3 for status updates
B1.1 Seek an equitable and efficient process centered on the relevant expertise that each PJM member may bring. Stakeholder Process Changes/Governance

A discussion paper to explore options to address recommendations B1.1 – B1.3 was reviewed at the 6.25.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). This discussion paper was entitled: Enduring Governance of PJM’s Financial Market

An initial proposal by PJM was presented at the 7.17.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF).

An updated version of PJM’s initial proposal was presented at the 8.14.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF) which included the addition of subcomponents in the solutions matrix.

B1.2 Financial market member committees: voting attendees must be qualified member personnel, such as credit professionals, traders, or finance professionals, as appropriate for the committee duties. Stakeholder Process Changes/Governance

A discussion paper to explore options to address recommendations B1.1 – B1.3 was reviewed at the 6.25.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). This discussion paper was entitled: Enduring Governance of PJM’s Financial Market

An initial proposal by PJM was presented at the 7.17.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF).

An updated version of PJM’s initial proposal was presented at the 8.14.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF) which included the addition of subcomponents in the solutions matrix.

B1.3 The number of committees involved in rule setting for financial markets should be strictly minimized to streamline decision making and assure clear accountability. Stakeholder Process Changes/Governance

A discussion paper to explore options to address recommendations B1.1 – B1.3 was reviewed at the 6.25.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). This discussion paper was entitled: Enduring Governance of PJM’s Financial Market

An initial proposal by PJM was presented at the 7.17.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF).

An updated version of PJM’s initial proposal was presented at the 8.14.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF) which included the addition of subcomponents in the solutions matrix.

B2 PJM should work with FERC to establish appropriate flexibility in policies and rulemaking concerning financial markets. Following are a few specifics we see at this time: Credit and Risk Management/Models A discussion paper addressing default and termination events was presented at the 9.5.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Events of Default and Market Participation Termination.   
B2.1 Amend tariff rules to make a parallel rule for FTR contracts, and other markets, to the provisions in Attachment Q for Peak Market Activity Transactions. Credit and Risk Management/Models A discussion paper addressing default and termination events was presented at the 9.5.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Events of Default and Market Participation Termination.   
B2.2 Amend rules to include within the definition of Material Adverse Change in Attachment Q an inability to meet any PJM margin call within two business days. Credit and Risk Management/Models A discussion paper addressing default and termination events was presented at the 9.5.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Events of Default and Market Participation Termination.   
B2.3 Provide rules that give PJM discretion to deal with unanticipated market emergency events. Credit and Risk Management/Models A discussion paper addressing default and termination events was presented at the 9.5.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Events of Default and Market Participation Termination.   
B3 As benchmark for progress with B1) and B2) - Examine the specifics and the cost/benefits of outsourcing to a credible outside provider the administration of all or part of the FTR market. Credit and Risk Management/Models A position paper to address recommendation B3 was reviewed at the 6.25.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). This position paper was entitled: FTR Default Allocation and Central Counter-Party


C) Build a Customer Awareness Beyond Market Procedures & Rules
3. PJM Failed to Perform Adequate "Know Your Customer" Procedures
ID Recommended Actions Work Stream Progress Completed
C1 Perform outsourced background checks for any member applicant, and should the applicant not be a public company, for the three most senior officers. Membership Qualifications/Market Participation

A position paper on PJM’s recommended changes for criteria associated with new and ongoing membership requirements was presented at the at the 8.14.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Due Diligence Criteria and Assessment Process

 
C2 Perform due diligence by confirming that an applicant for membership actually employs the systems and processes for risk management as represented. Membership Qualifications/Market Participation

A position paper on PJM’s recommended changes for criteria associated with new and ongoing membership requirements was presented at the at the 8.14.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Due Diligence Criteria and Assessment Process

 
C3 Provide explicit power for the rejection of a membership application should standards of good background and regulatory history not be met. Membership Qualifications/Market Participation

A position paper on PJM’s recommended changes on the authority to deny trading rights was presented at the at the 8.14.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: PJM Authorities and Discretion to Deny or Revoke Trading Rights

 
C3.1 Create an internal appeal mechanism in order to address any claims of any undue discrimination swiftly without unnecessarily involving FERC. Membership Qualifications/Market Participation

A position paper on PJM’s recommended changes on the authority to deny trading rights was presented at the at the 8.14.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: PJM Authorities and Discretion to Deny or Revoke Trading Rights

 
C4 Update the financial qualifications of participant companies at least annually and clarify PJM’s rights to act on a member’s failure to meet those requirements. Membership Qualifications/Market Participation A discussion paper addressing financial criteria for market participation was presented at the 9.5.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Establishing Financial Criteria Assessment and Credit Policy Enhancements for FTR Market Participation.  


D) Implement Technical Practices for Participant Risk Management
4. PJM Management Failed to Establish Robust Participant Risk Management Tools and Procedures
ID Recommended Actions Work Stream Progress Completed
D1 Clarify with the IMM any PJM expectations regarding participant risk management of (some) participant behaviors and reporting such with PJM. Market Rules/FTR Product Range    
D1.1 We understand that the IMM cannot have all information needed to effectively surveil (e.g. collateral balances and member good standing status information that only PJM holds). Credit and Risk Management/Models    
D2 Establish position limits for FTRs: Credit and Risk Management/Models

A report that examined limits on position, other forms of concentration limit, and the related topic of liquidity risk was presented at the 7.17.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Financial Market Reform Project Discussion Paper – Position Limits and Liquidity Risk

An examination of the pros and cons of potential approaches for calculating initial margins for participant FTR portfolios, with a recommended options for moving forward with the development of proof-of-concept models and associated back-testing was presented at the 7.17.2019 meeting of the FRMSTF. The report was entitled: Initial Margin Methodology Desktop Review.

 
D2.1 Based upon company capitalization. Credit and Risk Management/Models

A report that examined limits on position, other forms of concentration limit, and the related topic of liquidity risk was presented at the 7.17.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Financial Market Reform Project Discussion Paper – Position Limits and Liquidity Risk

An examination of the pros and cons of potential approaches for calculating initial margins for participant FTR portfolios, with a recommended options for moving forward with the development of proof-of-concept models and associated back-testing was presented at the 7.17.2019 meeting of the FRMSTF. The report was entitled: Initial Margin Methodology Desktop Review.

 
D2.2 Based upon position tenor (tighter limits towards the back). Credit and Risk Management/Models

A report that examined limits on position, other forms of concentration limit, and the related topic of liquidity risk was presented at the 7.17.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Financial Market Reform Project Discussion Paper – Position Limits and Liquidity Risk

An examination of the pros and cons of potential approaches for calculating initial margins for participant FTR portfolios, with a recommended options for moving forward with the development of proof-of-concept models and associated back-testing was presented at the 7.17.2019 meeting of the FRMSTF. The report was entitled: Initial Margin Methodology Desktop Review.

 
D3 Create internal participant risk management reports that are reliably generated on a periodic basis according to the frequency of opportunities for participants to change portfolio positions. Credit and Risk Management/Models    
D3.1 Among other measures, include statistical studies of participant exposure, tenor, collateral, MTA, and relationships between these measures. Credit and Risk Management/Models    


F) Increase the Frequency of Long-Term Auctions
9. PJM Market Design Flaws Gave GreenHat Room to Develop
ID Recommended Actions Work Stream Progress Completed
F1 Include Long-Term FTRs in monthly or at least bi-monthly auctions. Market Rules/FTR Product Range

A report to review FTR Performance Improvement Analysis was reviewed at the 6.25.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF).

A position paper on adjustments to the FTR auction design to mitigate financial risk in the FTR market was presented at the at the 7.17.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Financial Risk Mitigation Senior Task Force – FTR Market Proposal

An initial proposal by PJM was presented at the 8.14.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF).

F2 Convene a committee of FTR traders with PJM Credit & Operations to explore new approaches to make more frequent long-term auctions both more efficient to run and as liquid as possible. Market Rules/FTR Product Range    
F3 With expert help, conduct a general review of the FTR market and other PJM markets, to evaluate the risks and rewards of potential structural reforms. Credit and Risk Management/Models

A report to review FTR Performance Improvement Analysis was reviewed at the 6.25.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF).

A position paper on adjustments to the FTR auction design to mitigate financial risk in the FTR market was presented at the at the 7.17.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF). The paper was entitled: Financial Risk Mitigation Senior Task Force – FTR Market Proposal

An initial proposal by PJM was presented at the 8.14.2019 meeting of the Financial Risk Mitigation Senior Task Force (FRMSTF).