DEFAULT FUND

MCWG date

1

General Concept

Operate as a mutual fund Set a funded cap Set entity ongoing responsibility Set process to redistribute Use for all defaults

2

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

3

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?

4

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

5

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?

6

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

7

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

8

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

9

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

10

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

11

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)

12

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)

13