DEFAULT FUND MCWG date 1
DEFAULT FUND
MCWG date
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General Concept
Operate as a mutual fund Set a funded cap Set entity ongoing responsibility Set process to redistribute Use for all defaults
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How the fund would work
Default Fund
Initial Funding Default
Coverage
Monthly Rebalancing
Interest?Default Repayment
Includes payments by defaulted party and other participants per default allocation mechanism
New Entrants
Exiting Parties
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Initial Funding
Decision: Limit for the fund $20mm $10mm
Decision: Entity funding responsibility Risk based Same as allocation mechanism
Funding entities hold “shares” of the fund equal to their current % of total fund
Decision: Can entities use their funded amount against their ERCOT collateral requirements?
Decision: How quickly will initial funding take place?
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Fund Management
Decision: Managed by ERCOT or other? (Fees?) Decision: How will funds be held?
Low interest bearing account Market fund If ERCOT, managed against other ERCOT liabilities
Monthly true up Realign ownership based on initial funding mech Distribute interest earned or penalties repaid if any Per decision on repayments:
Request additional funds to replenish until repayments made
Distribute any repaid amounts
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Default Distribution
Should a default occur: All funds held by defaulted party used first
Question: Can fund be legally limited this way? Remainder of default charged to fund at
large Decision: Should remaining funding
entities replenish the fund or wait until allocation?
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New Entrants/Exiting Entities At monthly true up:
New entities will be aggregated in with all remaining entities as a part of the reallocation calculation
Any entities exiting the market will be distributed funds related to their holdings in the fund
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Example
Fund is set at $20mm 10 participants with equal responsibility
$2mm required per participant Payments are required monthly at rate
determined earlier Each entity holds 10% share of the fund
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A Default Occurs
One of the entities defaults with $11mm liability His portion of the fund covers the first $2mm,
the remaining $9mm is from the fund holdings of others
The fund has 9 participants and holds only $9mm
Each participant now has $1mm interest in the fund
Depending on decision made earlier: The participants begin to rebuild the fund The fund stays at this level awaiting allocation In all cases collection efforts take place for the
remaining $9mm and used to replenish the fund
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Monthly Reallocation
Back to original example: 10 participants/$20mm/$2mm each Assume 1 participants liability decreases to
5% and another increases to 15% The 5% party is paid $1mm out of the fund The 15% party is required to pay $1mm
into the fund The holdings of the parties are adjusted
accordingly
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Participant Entrance/Exit
Original example 1 party leaves At Monthly Reallocation that entity is paid
$2mm, all others pay in $222k All others now Original example 1 party enters and must pay into the fund
$1mm All others are paid $100k and their share of
the fund drops to 9.5% or $1.9mm
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Entrance/Exit Under Default
If the fund is not at the cap during an Exit The entity is paid for holdings per ratio at time of
exit Continues to receive ratio of payments returning
moneys into the fund Does not receive any additional interest allocations
A participant that enters during default must still pay in as if the fund were at the cap Does not receive payback from recoveries from
defaulted party or default allocations (did not pay into event, shouldn’t receive from event)
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Cost/Benefit
Costs: Administrative fees Float on amount posted (full if not netted)
Benefit: Vastly improved payment timeline (no short
pays) Additional margin if posting is greater than
margin amount (full if not netted)
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