PJM Files Process to Review Market Participant Risk Management Policies

PJM has filed tariff changes with FERC to implement, as required by FERC, periodic audits of a market participant's risk management policies by PJMSettlement.

As previously reported, in a September order, FERC ordered RTOs to get into the business of conducting compliance audits of new risk management standards required of market participants -- yet another expansion of RTOs beyond their originally conceived functions (see 9/16)

Specifically, PJMSettlement will now periodically review market participants' compliance with certain risk management policies and procedures that the market participant is required to have in place.

PJMSettlement annually will randomly select for review no more than 20% of the participants in each member sector. If a participant randomly is selected for the verification review process and is satisfactorily verified by PJMSettlement, it will be excluded from random selection for the subsequent two years.

PJMSettlement will review and verify, as applicable, a participant's risk management policies, practices, and procedures pertaining to the participant's activities in the PJM markets, including verification that:

1. The risk management framework is documented in a risk policy addressing market, credit and liquidity risks.

2. The Participant maintains an organizational structure with clearly defined roles and responsibilities that clearly segregates trading and risk management functions.

3. There is clarity of authority specifying the types of transactions into which traders are allowed to enter.

4. The Participant has requirements that traders have adequate training relative to their authority in the systems and PJM markets in which they transact.

5. As appropriate, risk limits are in place to control risk exposures.

6. Reporting is in place to ensure that risks and exceptions are adequately communicated throughout the organization.

7. Processes are in place for qualified independent review of trading activities.

8. As appropriate, there is periodic valuation or mark-to-market of risk positions.

The tariff revisions further provide that if principles or best practices relating to risk management in PJM-type markets are published by a third-party industry association, PJMSettlement may apply such principles or best practices in determining the sufficiency of the participant's risk controls. PJMSettlement may apply such published principles and practices following stakeholder discussion and with no less than six months prior notice to stakeholders.