UEEX has identified a region for pilot implementation of risk-based clearing on the timber market

On February 3, a meeting of the expanded Council of the Section of Ukrainian Energy Exchange LLC in the direction of "Untreated timber and lumber" was held. The meeting was held in a qualified composition with the participation of active market participants, specialized associations, state bodies and key market participants.

One of the key issues on the agenda was the determination of the region for the pilot implementation by the clearing institution UCH LLC of a differentiated approach to establishing requirements for clearing participants depending on the level of their credit risk (rating).

In particular, practical aspects of implementing a risk-based approach to clearing were presented. It was noted that differentiating requirements for trading participants depending on their payment discipline and credit profile would allow:

• reduce credit risks in exchange trading;
• separate bona fide participants from those who systematically violate payment obligations;
• create conditions for more flexible financial settlement models without additional burden on reliable buyers;
• increase the overall level of financial stability and confidence on the untreated timber market.

The Ukrainian Energy Exchange promptly responded to the request of market participants and submitted the relevant issue for consideration by the Section Council, which supported the decision on the pilot implementation of differentiated clearing requirements.

Following the discussion, the Section Council supported the proposal to designate Zhytomyr Oblast as a region for the implementation of a pilot project to introduce differentiated clearing requirements. There were no objections from the Section Council members.

The meeting participants emphasized that the proposed approach does not entail additional costs for bona fide bidders. Instead, the risk management system is designed to introduce transparent, understandable and objective criteria for assessing credit risk, which were previously often formed intuitively.

The implementation of a pilot project in the Zhytomyr region will allow us to test risk-based clearing mechanisms in practice, assess their effectiveness, and form the basis for possible scaling to other regions and segments of exchange trading.

It is important that this decision was formed at the request of the market participants themselves and is aimed at increasing the level of conscientious performance of concluded contracts, in particular in terms of financial obligations and payment discipline.

In addition, during the meeting of the Section Council, it was discussed:

• the possibility of introducing a price corridor determination methodology to respond to price anomalies during exchange trading;
• formation of a weekly calendar for displaying lots of untreated timber, taking into account regional and assortment specifics;
• proposals for improving standard forms of purchase and sale agreements and the use of risk management tools in financial settlements.