Let's talk about this when you get a chance.  Mark
----- Forwarded by Mark E Haedicke/HOU/ECT on 08/11/2000 05:04 PM -----

	Michael R Brown
	08/09/2000 05:48 AM
		 
		 To: Mark E Haedicke/HOU/ECT@ECT, Jeffrey T Hodge/HOU/ECT@ECT
		 cc: 
		 Subject: URGENT & IMPORTANT: Note re main legal risks re the EEX Spot Market

FYI , some interesting issues on the new exchange .
Michael
---------------------- Forwarded by Michael R Brown/LON/ECT on 09/08/2000 
11:49 ---------------------------


Mark Elliott
08/08/2000 14:59
To: Joe Gold/LON/ECT@ECT
cc: Michael R Brown/LON/ECT@ECT, Steve W Young/LON/ECT@ECT, Fernley 
Dyson/LON/ECT@ECT, Richard Sage/LON/ECT@ECT, Andrew Cornfield/LON/ECT@ECT, 
Tim Davies/LON/ECT@ECT, Diana Higgins/LON/ECT@ECT, Tina Ward/LON/ECT@ECT, 
Michael Schuh/FRA/ECT@ECT, Gregor Baumerich/LON/ECT@ECT, Heribert 
Kresse/FRA/ECT@ECT, Sandip Joshi/LON/ECT@ECT 

Subject: URGENT & IMPORTANT: Note re main legal risks re the EEX Spot Market

Joe,

Further to our discussion yesterday, when you mentioned that you wished to 
commence trading on the EEX Spot Market on and from Wednesday 9th August, I 
set out below the main elements of legal risk, as I see them, in the various 
elements of the Exchange Rules.  You should note as a general matter that the 
Exchange Rules are largely vague and ambiguous which only heightens the 
potential legal legal risk.

The Counterparty to our trades

Enron's counterparties to trades will be the individual market participants 
with whom our bids and offers get matched - our counterparty will not be the 
Exchange itself or a clearing house.

We shall only be told the identity of the counterparty(ies) with whom we have 
neen matched after that matching process has occurred.  There is no mechanism 
to filter counterparties based on credit quality, types of counterparty etc.  
Hence, there is no effective credit control left to trading participants over 
whom they should do deals with.

Collateral Arrangements

As far as security by way of collateral for trading exposures among the 
participants is concerned, initial collateral of Euros 100,000 is posted with 
the Exchange in one of the prescribed methods (bank guarantee, cash,etc) via 
one's "clearing" bank.  The Exchange will monitor the exposures of all the 
counterparties and can require more collateral to be posted overnight, on a 
variation margin basis, if a counterparty is exposed over the level of 
collateral previously posted.  Note that the collateral which the Exchange 
may require to be posted does not seem to include cover for any unpaid 
amounts where a participant has not paid for power delivered - it appears 
that it will only cover the mark-to-market value of deals struck on the 
Exchange which remain outstanding (i.e., pre-delivery)

In terms of the amount of collateral required to be posted, it would appear 
that each trade will be calculated on a gross, rather a net, basis (even for 
buys and sells with the same counterparty and not just trades with different 
counterparties).  The rules are very vague here.  I would suggest that your 
traders and RAC touch base on this issue and understand - by speaking to the 
Exchange if necessary - exactly the methodology of calculating our collateral 
posting requirement.  

Whilst the Exchange will monitor the participants' exposures and call for 
margin from the Participants' clearing banks as appropriate, there is an 
obligation imposed on each participant itself to be able itself to monitor 
its own exposures and its own collateral posting requirement.  It is unclear 
whether the Exchange has provided sufficient information in relation to the 
model to be used to enable us to fulfill this requirement.  I suggest that 
back office and RAC look into this immediately in conjunction with your 
trading staff.  Technically we can have our membership suspended if we do not 
comply with the Rules; more importantly,  from a good buisness practice 
perspective, we should be able to comply with the rules plus be able to know 
these figures each day.   RAC and your traders should therefore check that we 
can do this immediately.    

In the event that a counterparty defaults, there are two points to note.   
Firstly, what constitutes a default is unclear.  The Rules state that a 
default is where a counterparty is, to quote, "unable" to meet its 
obligations under the Rules.  Strictly, inability (e.g., insolvency) would 
not cover unwillingness (e.g.,, counterparty can pay but does not wish to pay 
for whatever reason).  Clifford Chance Germany have advised me that they feel 
that a German court would stretch the meaning to include unwillingness to 
meet obligations  but, of course, point out that this would be for a judge 
ultimately to decide.

Secondly,  even if a counterparty is in default as defined, there is no 
absolute legal obligation on the EEX to realise / call upon the collateral 
posted with it.  This will depend upon whether the management board of the 
EEX exercsies a discretion to instruct the EEX to do so.  In my view. the 
Exchange could well take the view that as the trades are a matter between the 
individual participants (as the Exchange is not the counterparty), the 
Exchange may well be unwilling to realise collateral until the outcome of 
arbitration between the parties to a dispute.  Clearly this could be a number 
of weeks or months after the non-payment dispute arose and hence increasing 
our credit risk.  Please note that there is no clear recourse to the Exchange 
in the event that the Exchange itself refuses to realise collateral.

If the Exchange does realise the collateral however, it will hold it for the 
benefit of all Participants.  Note, however, that this does not seem to cover 
previously unpaid amounts as mentioned above. 

Taxes

End consumers can be participants on the Exchange.  As this is the case, if 
we get matched with an end consumer, then apparently we open ourselves up to 
potential liability to pay German energy taxes.   Clifford Chance have advise 
me that, whilst this remains an unresolved issue, apparently the German 
fiscal authorities appear only to ensure that German-based entities pay such 
tax, rather than foreign-based ones such as ECTRL, which is our trading 
participant.  If you require further details on this, please refer to Tina 
Ward in Tax Department.

Renewable Energy Sources Act.

Again, if we, as a seller, were matched with an end-consumer, then under this 
Act we are obliged to ensure that we source approximately 3.45% of the energy 
sold from a renewable source.  I understand that this is approximately 4 
times as expensive as normal domestic power, coming in at around 16.75 
pfennigs per kWh.  It is entirely unclear how this will be monitored and 
enforced in respect of dealings on the Exchange, although Cliffords' view is 
that this will be done in some way through the Balancing mechanism.  May be 
your traders should look into this in greater detail, should it be of 
concern. 

Settlement

On a purely logistical level, for your general information, please note that 
physical power delivery is T+1, whereas Buyer settles T+2. 

The Exchange states that bills from sellers to buyers will go to the buyers 
via the Exchnage.  It is unclear how the mechanics of this work (they are not 
dealt with in the Rules to any greater extent).  I would suggest that your 
trading staff and our settlements staff look into this immediately, by 
speaking directly to the Exchange if necessary.  It should also be borne in 
mind that I assume that invoices will have to raised and issued within the 
T+2 framework.


IMPORTANT NOTE:

Clearly we want eventually to put this trading participation thorough a 
formal and final CACs  process (the rules have totally altered since we 
CACs'd it last time three weeks ago).  However, I understand that you would 
like to be able to trade from tomorrow, which will be a few days in advance 
of the CACs  process (additional rules in German have only just been sent to 
me, and hence I cannot tell you at present what is the import of these).  In 
this respect, please note that ECTRL is joining as a Market-Maker and hence, 
under the Exchange Rules, if you wish to proceed, we would have the 
obligation from tomorrow to quote firm two way prices during normal market 
opening hours.  The Exchange can promulgate rules prescribing the length of 
time for which bids / offers are active, minimum / maximum volumes bid / 
offerred, the width of spreads, etc.,.; I understand from Clifford Chance 
that the Exchange has not yet prescribed these rules.  What we do know at the 
moment is that if we fail "too often" to quote as a market maker, then the 
exchange can remove / suspend us as a trading participant.  In order to 
mitigate your risk at present therefore, you may wish to consider the size of 
volumes we would quote and width of spreads, etc.., and discuss with RAC and 
/ or Credit beforehand.

Finally, I understand that: (a) Dresdner's banking terms for us have still 
not been agreed (apparently these are being dealt with at an Enron Houston 
Legal Department level) and therefore I cannot tell you whether Dresdner 
would be willing to provide the collateral guarantee etc before these are 
agreed and (b) I understand that the EEX still has some outstanding points re 
our Balancing arrangements which would need to be finalised before we could 
trade.  Sandip is in contact with Enron Houston over (a) and I understand 
that Heribert and Michael Schuh are dealing with the Balancing 
arrangements.   

Subject to clearing the items in (a) and (b), and discussing volumes, spread 
etc with RAC / Credit etc.,  if you wish to proceed tomorrow, please let me 
know as I shall need to write to the Exchange this afternoon informing them 
of this (our application forms were submitted under the caveat that we would 
write to them when we wished our membership to go active).

Kind regards

Mark