EFET Master Trading Agreement and

contractual standards for trading in the EU

Athens, 12 June 2019

Correggio ConsultingBoutique consulting company set up in 2006 by Jan Haizmann

after 15 years of legal and commercial practice

OUR SERVICES involve advising corporations, start-ups, governments, and International Organizations in areas such as legal, regulatory, operations, commerce and strategy. Below is a list of services rendered:

• Regulatory and legal due diligence; in-house style regulatory function.

• Market entry strategy for power and gas markets.

• License submissions and co-ordination of pan-European registration procedures as an outsourced service.

• Project support for asset purchases in gas and power.

• Assistance in negotiating legal arrangements for electricity and gas.

• Legal risk analysis in the context of market risk reports or counterparty risk reports.

• Assistance in regulatory compliance for power and gas market participants in multiple European countries.

• Support in finding investment opportunities in the gas industry.

• Anti-trust and compliance audits for energy supply and trading agreements.

• Corporate positioning vis-à-vis regulators and state authorities.

• Asset reviews, with a focus on wholesale trading portfolios.

• Institutional consulting within international framework service contracts.

• Implementation of the greenhouse trading schemes in the EU.

• Monitoring EU legislation in competition policy law and energy regulation;

• Carrying out compliance audits in relation to customs and duties, financial and environmental regulations.

• Filing notifications with the European Commission and the relevant national authorities in relation to merger and acquisition deals.

• Market research and reporting.

• Product Compliance Audits.

Workshop leader: Dr. Jan Haizmann

Academia

Studies & Gratuation Universität Freiburg (Germany)1st State Exam in Law (1990)In Munich 2nd State Exam in Law (Ass.iur 1994), Post-Grad: Brussels University (Dr. iur. - 1998) and London University (LL.M. 1991)Admission to The German Bar, OLG München 1994

Career

1994-1999 Associate Lawyer Graf von Westphalen, Freiburg & Brussels Office 1999-2001 Director Regulatory Affairs, ENRON, London and Frankfurt2001-2002 Senior Legal Counsel, TXU Energy Trading SA, Geneva2003-2005 Front Desk Gas, Glencore Energy, London

Since 2006 Chairman EFET Legal Committee, Director EFET Brussels OfficeBoard Member EFET, Amsterdam, Member of the EEX Exchange Council, LeipzigFounder and Managing Director of CORREGGIO CONSULTING (www.correggio-consulting.eu)Built own practice as independent international expert for energy trading Partner in European Energy Lawyers Association (www.eela.eu)

Introduction

• Value of Standardisation

• Introduction and key mechanics of the EFETMaster Agreement (Base Overview)

• Discussion on modifiable articles in the ElectionSheet

• EFET Credit Support Annex

• BREXIT contractual issues: potential legalconsequences

Overview

ISDA➢Financial OTC Trading (Derivatives)➢Developed by banks (ISDA 1992 und 2002)➢Template for standard contracts for physical electricity and gas trading, developments for Irish law and French law.

EFET➢Physical OTC Trading➢Developed by EFET in cooperation with energy traders➢Since 2000 established as standard for electricity and gastrading in Continental Europe

GTMA:➢Historical Standard for physical OTC trading of electricity in England & Wales

PART I: a walk through theEFET standards

Standardisation: Do we need it?

Risks need adequate risk management (1)

DEFAULT (COUNTERPARTY) RISK

The Seller does not deliver the agreed volume.The Purchaser does not take delivery/pay the agreed price.

Seller Trader Purchaser

EFET Agreement EFET Agreement

Check and Manage Credit Risk(EFET clauses)

Risks need adequate risk management (2)

PERFORMANCE RISK

The Trader is required to:

• purchase replacement volumes at a higher price than the price agreed with the Defaulting Seller.

• sell the volume to a different Purchaser at a lower price than the price agreed with the Defaulting Purchaser.

Need to agree on Early Termination Clauses &Close-Out Netting

Risks need adequate risk management (3)

Trading commodities in a liquid market is a mass business, i.e. a multitude of transactions are entered into every day.

Mistakes occur when operationally handling the transactions.

Use EFET Standard Agreements &Confirmations

Operational Risk

Risks need adequate management (4)

Agree on EFET GAS TRADE RESTRICTION CLAUSE to cater for sanctions relating to Russia

Need for KYC – Identity of Ultimate Beneficiary vs SDN List

Political Risk – Trade Restrictions

The counterparty is added to EU sanctions listUS Sanctions vs EU Sanctions

Navigating the EFET Universe ofDocumentation

EFET General Agreement Electricity

EFET Credit Support Annex (CSA)

CO2

Austrian VTP

EFET Master Netting Agreement (MNA)(formerly: CPMA)

TTFGaspool

EFET General AgreementNatural Gas

NBP & beachZeebrugge

CSA CSA

PEG PSV

Polish VTP

IBP/ IrelandAOC

UK Beach

CO2

EMIR RMTA

EECS - GA

The EFET Universe of Documentation

The EFETGeneral Agreement (Electricity/Gas)

Breaking down the EFET General Agreement (1)

Individual

ContractIndividual

ContractGeneral Agreement

The General Agreement is the legal framework:

„(…) governs all transactions the Parties shall enter into for the purchase, sale, delivery and acceptance of Electricity/Natural Gas including Options (…) (each such transaction being an „Individual Contract“) .“

Individual

Contract

Individual

Contract

Breaking down the EFET General Agreement (2)

Main

DocumentAnnex 2 a-d

(Confirmation

Templates)

Election Sheet

Annex 1

Definitions

§1.1

Subject of

Agreement

The General Agreement has several components:

„(…) this General Agreement (which includes annexes and the election sheet („Election Sheet“)) (…)“

Why so many parts?

Not negotiated:

• Main Document = 24 pages• Annex 1 (Definitions) = 7 pages

TOTAL= 31 pages

Negotiated:

• Election Sheet = 7 pages• Individual Contract = 2 pages

TOTAL= 10 pages

And on top of this ...

“I buy 100 MWh from you for delivery in Q1 2018 – and the rest is

per the EFET!!!! “ Whilst the General Agreement (framework) is made in writing …

… the Individual Contracts canbe concluded over thetelephone(provided your jurisdiction allowscontracts to be concluded this way)

The §§ of the General Agreement (Overview)

Performance Assurance§17

Conclusion of Individual Contracts,

§3

Delivery &Acceptance,

Payment

§§4-6

Assignment, Confidentiality,

Reps & Waranties, Governing Law &

Jurisdiction

§§19-23

Invoicing, Taxes

§§13-14

Liability

§12

Force Majeure

§7Failure to Deliver or

Accept

§8

Early Termination

CLOSE-OUT NETTING

§10-11

els –Legal -page 3

Credit Derivatives

Intro to the close out netting (1): credit risk mitigation techniques

– Traders use different credit risk mitigation techniques.

– Credit risk management recognises risk mitigation, provided it results in reduction of credit risks and it is legally enforceable. This is currently not the case in Russia → should be subject to legal reform

– As far as banks and Investment Firms are concerned: to the extent risk mitigation is eligible, institutions are allowed to reduce their credit exposure when calculating their capital requirements

Collateral SecuritisationGuaranteesNetting

The idea behind Close-out Netting… is again about RISK MANAGEMENT

Close-Out Netting

➢Reduces Exposure (= the economic risk of a Party from the total Agreement) to a minimum!

Party A Party B

Risk: EUR 30

With Close-Out Netting

Insolvency

Risk: EUR 100 + 70 = EUR 170

Without Close-Out Netting

Party A Party B

Close-Out Netting (Step 1)

§10.5(c) of the General Agreement – Winding-Up/Insolvency/Attachment

§§10.3-10.5 – Termination for Material Reason• Material Reason• From Early Termination Date: all future payments and performance in respect of all Individual Contracts released• Obligation of one Party to pay the Termination Amount (§11)

Early Termination

§10.3

Close-Out Netting (Step 2)

EarlyTermination

§10.3

§11.2 – Calculation of Settlement Amounts

• Calculation of Settlement Amounts (from all Individual Contracts)• Settlement Amounts = Gains – Losses + Costs

SettlementAmounts§11.2

Close-Out Netting (Step 3)

§11.1 – Calculation of Termination Amount

• Netting of Settlement Amounts and all other amounts• Results in one single Termination Amount (it is unsure

whether this concept is recognized in Greece)

If amount is negative – the Terminating Party has to paythe Termination Amount

Early Termination

§10.3

SettlementAmounts§11.2

Termination Amount§11.1

Netting of Physically-settled OTC Transactions…

Check theEFET Legal

Opinion for the

jurisdiction of your

counterparty!

Netting Matrix

• Contractual risk management requires constant review ofnetting for counterparties per jurisdiction

➢ National insolvency law overrides contractualstipulations – If Insolvency of your counterpartyhappens, Greek Insolvency laws override the EFETcontractual clauses

• EFET Users need to keep netting matrix across theEuropean Union to assess the enforceability of close-outnetting

➢ EFET sells Netting Opinions for 25 Jurisdictions

➢ EFET Legal Opinions are basis of “Netting Matrix”

QUICK WALK THROUGH…

25

§1 – Subject of Agreement

• §1.1 – Subject of AgreementThe General Agreement governs ALL transactions of the Parties for the

purchase, sale, delivery and acceptance of electricity/natural gas(including Options)

• §1.2 – Pre-existing ContractsIf this§1.2 is specified as applying, each transaction between the Partiesregarding the purchase, sale, delivery and acceptance ofelectricity/natural gas (including Options) entered into before theEffective Date but which remains either not yet fully or partiallyperformed by one or both Parties, is deemed to be an Individual Contractunder the Agreement.

§2 – Definitions and Construction

• §2.2 – Inconsistencies

In the event of any inconsistency between the provisions of the Election Sheet and the other provisions of this General Agreement, the Election Sheet shall prevail.

In the event of any inconsistency between the terms of an Individual Contract and the provisions of this General Agreement (including ist Election Sheet), the terms of the Individual Contract shall prevail for the purposes of that Individual Contract.

§3 – Concluding and Confirming Individual Contracts (1)

• §3.1 – FormIndividual Contracts may be concluded in any form (orally or otherwise).

➢ § 23.1 – Recording of telephone conversations & use asevidence

• §3.2 – Confirmations – no requirement for a bindingcontract!

➢ In the event that an Individual Contract is not concluded in written form, both Parties shall be free to confirm in writing their understanding of the agreed terms of the Individual Contract

§3 – Concluding and Confirming Individual Contracts (2)

• § 3.3 – Objections to ConfirmationsIf a Party receives a Confirmation, it shall promptly review the terms of such Confirmation and if they differ from its understanding of the terms of the applicable Individual Contract, notify the other Party of any inconsistency without delay.

If both Parties send a Confirmation without delay and their termscontradict, then each such Confirmation shall be deemed to be anotice of objection to the terms of the other Party‘s Confirmation.

• §3.4 – Optional: Authorised Persons Lists

§4 – Primary Obligations For Delivery andAcceptance

• Primary Obligations of the Seller:➢ The Seller shall sell and deliver the Contract Quantity at the

Delivery Point

• Primary Obligations of the Buyer:➢ The Buyer shall purchase and accept the Contract Quantity at

the Delivery Point; and ➢ shall pay to the Seller the relevant Contract Price

• Bilateral Obligation:➢ Scheduling as defined in §4.2

§5 – Primary Obligations For Options

• The General Agreement also applies to Options:

➢ Call Options and Put Options➢ Seller of the Option = Writer and Purchaser of the Option = Holder➢ The Holder pays to the Writer the Premium➢ Option = right, but not obligation, to Exercise➢ Exercise of the Option during the Exercise Period by the Exercise Deadline

• When an Option is exercised, the Writer and the Holder have the primary obligations under §4

§6 – Delivery, Measurement, Transmission and Risk

• Specification of Delivery:➢ Electricity: current/frequency/voltage in accordance with the

standards of the relevant Network Operator

➢ Natural Gas: quality and pressure requirements of the relevant Physical Downstream Transportation System

➢ Note EFET Gas: §8a - Off-Spec Gas

• Transfer of Rights and Title:➢ At the Delivery Point

• Measurement & Documentation

§7– Force Majeure (1)

§7.1 – Definition of Force Majeure

„An occurrence beyond the reasonable control of the Party claiming Force Majeure (the „Claiming Party“) which it could not reasonably have avoided or overcome and which makes it impossible for the Claiming Party to perform (…) its delivery or acceptance obligations.“

Including, but not limited to:

Failure of communications/computer systems of the relevant Network OperatorRelevant Network Operator’s failure to respond

§7– Force Majeure (2)

UNLESS: Transportation Failure, i.e. an event which (i) is beyond the reasonable control of the Claiming Party and the

Network Operator and

(ii) could not reasonably have been avoided by either of them and(iii) makes it impossible for both of them to perform.

§7.1 – Only in the EFET Gas:

No Force Majeure in case of

(ii)(i) curtailment or interruption of transportation

rights, orany other transportation problem

§7– Force Majeure (3)

• §§7.2 & 7.4 – Consequences of Force Majeure:➢ Both Parties are released from their respective delivery or acceptance

and payment obligations.

➢ No obligation to pay damages pursuant to §8 (Failure to Deliver or Accept)

• §7.5 – Only in the EFET Gas: Long Term Force MajeureWhen exceeding the Long Term Force Majeure Limit termination right of the other Party

§ 8– Failure to Deliver or Accept

• Under-/overdelivery or under-/overacceptance

• The other Party has a right to claim compensation

• Difference between Contract Price und market price (in most cases price of balancing energy)

• The idea is for the other Party not to suffer any economic loss. The other Party may or may not use the compensation payment for a replacement purchase

§ 9 Suspension of Delivery or Acceptance

• Should a Party default on any payment or should it fail to provide anyCredit Support Document or Performance Assurance, the Non-DefaultingParty is entitled to cease further delivery or acceptance (released, not merelysuspended, from ist obligations):

• No earlier than three (3) Business Days after sending a written notice to theDefaulting Party

• The Defaulting Party may avert the consequences of this clause during thegrace period by performing ist obligations

• Note only in the EFET Gas: In addition, the Non-defaulting Party has theright to withhold payments owed by it to the Defaulting Party under theAgreement

§ 10 – Term and Termination Rights (1)

• §10.2 – Ordinary Termination• Expiration Date and 30 day notice• „shall apply and there shall be no Expiration Date“• Shall remain legally binding for existing rights and obligations

• §§10.3-10.5 –Termination for Material Reason• With effect from the Early Termination Date all further payments

and performance in respect of all Individual Contracts shall be released

• Obligation of one Party to pay the Termination Amount calculated in accordance with §11.1 to the other Party

§10 - Term and Termination Rights (2)

• Aim: Terminate early enough to avoid so calledCherry Picking Right of insolvency administrator

• §10.5(a) – Non-Performance• Failure to pay or to deliver any Performance Assurance• Can be first signs of an impending insolvency!

• §10.5(b) – Cross Default and Acceleration• Defaults under Specified Indebtedness between the

other Party and a third party (credit institution)

• §10.5(c) – Winding-up/Insolvency/Attachment

§10 – Term and Termination Rights (3)

• §10.5(d) – Failure to Deliver or Accept (optional)

• §10.5(e) – ONLY in the EFET Power: Long-termForce Majeure – compare §7.5 of the EFET Gas

• §10.5(f) [(e) in the EFET Gas] – Representation or Warranty

• Often: Other Material Reason - Specified Transaction Default

§10.4 – Automatic Termination

• Election depending on insolvency law applicable to the other Party – somejurisdictions do not allow automatic netting.

• Two contradicting views under Greek law:➢ Netting is not enforceable after the declaration of Bankruptcy as it may be

considered a circumvention of bankruptcy law.➢ Termination took place prior to Bankruptcy and therefore the prerequisites of set-

off existed before the declaration of Bankruptcy, which means set-off is possible.

To make Automatic Termination operative in the context of close-out netting incompatibility with Greek law, suggestion to amend clause 10.4 as follows: “... andthe Early Termination Date in such event shall be considered to occur immediatelyprior to the occurrence of any of the events listed in 10.5.c. ...”

Automatic Termination

Cherry Picking (Selection) Rightof the insolvency administrator,i.e. right to refuse performanceof unprofitable contracts and toenforce profitable ones

“manual”Termination

Day 0

Post Day 0

Institution of Insolvency

Proceedings

Opening of Proceedings

Automatic Termination

Prior to

Day 0

Prior to

Day 0

§11 – Calculation of the Termination Amount

• Termination Amount = sum of all Settlement Amounts for all Individual Contracts (Close-out Netting)

• Settlement Amount = Gains – (Losses + Costs)

• The Terminating Party might be the one obliged to pay the Termination Amount!

§12 –Limitation of Liability

• §12.2 – Exclusion of Liability

Amend „gross“ before negligence in the EFET Gas, otherwise you are liable for simple negligence!

§13 – Invoicing and Payment

• §13.3 – Payment Netting➢ Every-day netting ≠ Close-Out Netting!

• §13.5 – Interest Rate

• §13.6 – Disputed Amounts➢ (a): Pay first [subject to manifest error], dispute later➢ (b): Pay first only undisputed amount

§16 – Guarantees and Credit Support

• §16 – Credit Support Documents & Credit Support Provider

„ (…) the Parties may agree, on or at any time after the Effective Date, or at the time of the concluding of each Individual Contract (…)“

➢ Parent Company Guarantee➢ Bank Guarantee➢ Letter of Awareness re Control and Profit Transfer

Agreement➢ Letter of Credit

§17 – Performance Assurance (1)

• §17.1 – Right to Require

• If a Party believes in good faith that a Material Adverse Change has occurred

• To be provided within 3 Business Days from a written notice

• Otherwise: Termination Right of the Requesting Party §10.5(a)

§17 – Performance Assurance (2)

• §17.2 – Material Adverse Change

• §17.2(a) and (b) - Credit Ratings (Party/Bank as CSP)

• §17.2(c) and (d) – Financial Covenants, Decline in Tangible Net Worth

• §17.2(e) and (f)– Expiry/Failure of Performance Assurance or Credit Support

• §17.2(g) – Failure of Control and Profit Transfer Agreement

• §17.2(h) – Impaired Ability to Perform

• §17.2(i) – Amalgamation/Merger

§18 – Financial Statements and Tangible Net Worth

§18.1 – Annual/Quarterly Reports (Optional)

§18.2 – Tangible Net Worth (Optional)

§19 – Assignment

• §19.1 – ProhibitionNot without prior written consent of the other Party

• §19.2 – Assignment to Affiliates (Optional) Affiliates must be of an equal or greater creditworthiness and incorporated in the same jurisdiction

§20 – Confidentiality

• §20.1 – Confidential Obligation (Optional)The terms of an Individual Contract are confidential

• §20.2 – Exclusions

§22 – Governing Law and Arbitration

• §22.1 – Governing Law• EFET Power – German law• EFET Gas - Option A (English Law) or Option B (German Law)

• §22.2 – Arbitration• EFET Power – German Institution of Arbitration (DIS)• EFET Gas - In case of Option A: Rules of the London Court of

International Arbitration (LCIA); in case of Option B: DIS

BREXIT Contractual Issues I

53

Choice of Law

Proceedings are brought before an EU 27 Court:

Rome I and Rome II Regulations will continue to apply in the EU

English law as the governing law of contractual and non-contractual obligations will be recognised by EU 27 Courts

Proceedings are brought before an English court:

Rome I and Rome II Regulations will no longer directly apply in the UK

Art. 66 of Withdrawal Bill: Rome I and Rome II Regulations are planned to form part of “retained EU Law”. UK courts should recognise EU 27 laws but uncertainty prevails.

BREXIT Contractual Issues II

54

Jurisdiction and Enforcement

Brussels I Recast Convention no longer applicable in the UK unless implemented

Enforcement of a judgement issued by an English court is sought in an EU 27 court:

Depends on the rules of private international law of the jurisdiction in which enforcement is sought

• More procedural and substantive conditions to enforcement

• Local law advice will be needed on a jurisdiction-by-jurisdiction basis

• UK Court Rulings no longer automatically enforceable

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Thank you for your attention!