Wholesale trading of energy in Europe is a relatively recent phenomenon. It started with the liberalisation of energy markets driven by the EU in the 1990ies. From that time on, network operators were separated from utilities, and trading organisations came into their own. For a while, prices and volumes went in one direction only: Up. Life was a party, until Enron went bankrupt in 2001. This took the air out of the room. Having the right clauses in master agreements, a good and current assessment of counterparty risks and exposure, and proper documentation of trades became very valuable. This put the spotlight on the Back Office and Risk Management of trading organisations, a part of the business not nearly as glamorous the Front Office, where trades are executed. But the Back Office is where the ledger is kept, trades registered, and risks checked. And the Back Office was using paper, faxes, e-mails, lists, and post-it notes. Lots of post-it notes. Energy trading was still young, new trade instruments were developed all the time, and new counterparties entered the market. While profits were high and risks perceived to be low, it seemed ok to run this business in a manual and rather haphazard way. After Enron, not anymore.

Luckily, an industry association ready to step up to the task already existed: the European Federation of Energy Traders (EFET) had been created in 1999, two years prior to the Enron crash. Its biggest achievement at the time had been the EFET Master Agreement, which facilitated standardized trading on the OTC markets, outside of cleared exchanges. The EFET master Agreement allowed traders to reduce their exposure to insolvency of counterparties to the net amounts owed. Since most trade relations between the bigger players in the OTC energy space are two-way, with both parties buying and selling, this drastically reduced the risk of trading. EFET had a task group for the Back Office, which took on the challenge of standardising and automating the trade confirmation process. This workgroup created the first XML-based standard for electronic Confirmation Matching, or eCM.

Before eCM came along, parties to each OTC trade would exchange faxes or e-mails with the trade details, with people on each end checking these for differences – a truly tedious job. A common error would be directional: Both parties to the trade erroneously entered a trade as a “Buy”, when in fact only one of them had been the seller. Such an OTC forward would then linger in the books until the start of delivery, sometimes years in the future. At such time, the error would become apparent – with the actual seller now having to deliver the power and cover the shortfall in their own portfolio as well. With the spot price very different from the original price, suddenly having to purchase twice the original volume could be very costly – up to millions of Euros in case of a substantial base load deal.