B3 registers electricity OTC derivative contracts in the Forward, Swap and Option modalities. They work as a hedging mechanism against the fluctuation of electricity prices, helping companies that trade these contracts to better manage their risks and allowing for greater predictability of results.
Derivatives are financial instruments whose value is derived from other assets, such as currencies, indices, interest rates and commodities, and are known as underlying assets. In the case of electricity, the asset currently used is the Difference Settlement Price (PLD) as calculated by the Electricity Trading Chamber (CCEE). The registration system allows choosing the PLD type (weekly average PLD per macro-region and load type and monthly average PLD).
- Electricity traders interested in locking the PLD future price.
- Companies wishing to obtain financial returns on price fluctuations.
- Investors wishing to profit from the expectation of a rise or fall in prices.
Derivative contract trades are carried out on a bilateral basis between the parties and the agreed parameters are registered at B3, as is the case with all trades carried out on the OTC market. As it is an OTC bilateral trade, the credit risk lies with the counterparty. At maturity, the buyer receives or pays the settlement value, depending on the difference between the agreed price with the counterparty and the PLD price on the expiration date.
Learn about the step by step of trading:
1. Pre-trading
The parties sign the Global Derivatives Contract (CGD) containing the basic principles of their bilateral relationship, such as collateral, netting clauses, default terms and conditions, and other agreed items.
2. Trading
The parties define the trading parameters between them: underlying asset (PLD type), price, quantity and expiration date, among others. Trading is carried out by any means that the parties deem suitable (telephone, email, trading platform, etc).
3. Post-trading
After executing the trade, the parties may issue a document with a summary of the parameters agreed between them (also known as confirmation). The information is checked and then registered.
4. Registration at B3
Registration on the B3 system can be done by any company with access to the OTC Derivatives module without central counterparty (CCP) usually via banks and brokerage houses.
5. Cash settlement
At maturity of the transaction, the B3 system calculates the settlement price to be paid between the parties. As it is an OTC trade, there is no hedging or coverage by B3 against non-payment of the amount due between the parties.
- Parameter flexibility: The parties freely trade the underlying asset (PLD Average SE/ CO, for example), price, quantity and maturity.
- Credit risk: Unlike what happens in the exchange market in which B3 is the trading counterparty, in OTC trades the credit risk lies with the parties.
Learn how the OTC market works.
For further information, talk to our Products team by telephone on +55 11 2565-5966 / 2565-5956 / 2565-5954 / 2565-5950 / 2565-6685 / 2565-6532 or by email at derivativos@b3.com.br
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