Maximum Cost and Cost Per Unit of Benefit Constraints

Defined below are the cost of compression, cost per unit of benefit, and the input specification features TPHs use to specify maximum values for cost and cost per unit of benefit they are willing to incur in a multilateral compression.

TPHs participate in multilateral compression to realize maximum regulatory capital benefit while satisfying constraints, which includes cost constraints. The cost of compression is the total mark to market cost of a portfolio of trades allocated to a TPH. TPHs can place an upper limit on the total cost they are willing to pay in a multilateral compression.

The CCS system uses final indicative prices that are disseminated to OPRA as the prices at which CCS compression trades will clear. Compression trade prices are derived from live markets trading at 16:00 ET. The degree to which these prices deviate from TPH internal views of the theoretical value (theo) of the options comprising the compression portfolio determines the overall compression cost to the TPH. For example, if a TPH is buying to close a short position and the compression price is higher than the TPH view of the option theoretical value, the trade will incur a mark to market debit. Conversely, if the compression price is lower than the TPH specified theoretical value of the option, the TPH would incur a net mark to market credit as a result of the trade.

TPHs specify the theoretical value of one contract of an option in the theo field of the position specification rows (see field 6 in Table 1) specified to two decimal point precision. Values specified to higher precision are rounded to two decimal points. The cost of a single trade is computed as the signed traded quantity in contracts multiplied by the compression price minus the TPH specified theo value of the option. Since both the TPH-specified theo and the exchange sourced compression prices are expressed per contract, the trade cost is the contracts-traded weighted difference of the compression price and TPH specified theo. The total cost of the multilateral compression portfolio to a participating TPH is the sum of the cost of all trades in the compression portfolio in which the TPH participates.

TPHs specify the maximum cost (net debit) they are willing to incur in a multilateral compression. The CCS does not provide the ability to specify a minimum cost (net credit) they are willing to receive. It is assumed that TPHs are willing to book any level of mark to market gain while receiving capital regulatory benefit that satisfies risk constraints. To specify the maximum cost (debit) TPHs provide a non-negative value in cost field (10) of the maximum value row (3), where a value of zero indicates they are not willing to accept any net debit and a positive value is the maximum net debit they would be willing to incur in a multilateral compression. The CCS accepts the maximum cost value with two decimal point precision (i.e., cost in dollar terms). Values specified with higher precision are rounded to two decimal points.

In addition to specifying a limit to the net cost that a TPH is willing to incur in a compression portfolio, TPHs further specify a limit on the cost per unit of regulatory capital benefit received. In the event that the maximum cost is not reached, the maximum cost per unit of benefit ensures that TPHs receive a minimum amount of benefit for each dollar 'spent' in a compression. TPHs specify the maximum cost per unit of benefit by providing a non-negative value in the cost_benefit field (11) of the maximum value row (3), where a value of zero indicates they are not willing to accept any net debit regardless of the amount of benefit delivered. The CCS accepts the maximum cost per unit of benefit value with six decimal point precision. Values specified to higher precision are rounded to six decimal points.

Consider a TPH that is willing to incur up to $10,000 net debit in a compression. Further, the TPH wishes to constrain the maximum cost per unit of benefit such that $1 of cost delivers $1,000 of capital regulatory benefit. The maximum cost per unit of benefit in this example is 0.001000 (i.e., 1 / 1,000). The first three lines of the TPH input file encoding these maximum cost and maximum cost per unit of benefit constraints is shown below: