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| Henry Hub Basis Swap Futures (Platts IFERC) |
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The Henry Hub in southern Louisiana is the principal pricing point for U.S. natural gas markets. It is the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region's prolific offshore and onshore gas fields and ship that gas to markets along the East Coast, the Gulf Coast, the Midwest, and north to the Canadian border.
The New York Mercantile Exchange, Inc., natural gas futures contract specifies the hub as its delivery point, and vigorous cash market trading has developed there in the wake of the growth of a highly liquid, transparent futures market. Approximately 1 billion cubic feet a day flows through the Henry Hub. Given that a significant amount of physical gas sales are indexed to Inside FERC, the need for a basis market has arisen.
The volatility of natural gas prices has given rise to a basis market that is quoted as a differential to the price of the Henry Hub natural gas futures contract, which is the benchmark for forward natural gas markets industry-wide because of its liquidity and transparency. The cash market prices of gas at Henry Hub and the natural gas futures contract settlement prices should theoretically be the same – and the physical-delivery futures contract prices do converge with cash market prices upon the termination of trading in the first nearby futures contract – yet an active over-the-counter basis market developed to protect against any inefficiencies that might develop between the two markets.
To give market participants more complete risk management coverage on the basis between Henry Hub cash and futures prices, the New York Mercantile Exchange provides a Henry Hub basis swap futures contract. The final settlement is calculated as the Platts Inside FERC's Gas Market Report Henry Hub index price minus the final settlement price of the NYMEX Division Henry Hub natural gas futures contract for the corresponding month on the last trading day. Platts Inside FERC calculates the Henry Hub index price from its monthly bid week survey of buyers and sellers who ship base-load gas through the hub.
The lot size of 2,500 million Btus represents a commonly traded market unit and is one-quarter the size of the Henry Hub futures contract, giving market participants additional flexibility in managing price risk. The contract must be traded in a multiple of the number of calendar days in the month.
All positions will be aggregated and margined according to the value at risk as calculated by the SPAN® system. Cross margining of offsetting positions across markets can result in reduced margin obligations.
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