Frequently Asked Questions: WTI Houston Futures Dock Allocation Run Process

  • 3 Feb 2021
  • By CME Group
  • Topics: Energy

Frequently Asked Questions

  1. What is the WTI Houston futures (Code HCL) Dock Allocation Run process?
  2. What is the connection between WTI Houston (HCL) futures contracts and the Dock Allocation Run process?
  3. Why are allocations of loading windows being offered?
  4. Is the Dock Allocation Run process a mandatory part of deliveries under WTI Houston (HCL) futures contracts?
  5. Is the allocation of loading windows during an allocation run completely random?
  6. How are “decades” defined?
  7. How are “loading windows” defined?
  8. Are the specific dates of an allocated loading window fixed at the time of allocation?
  9. Does participation in an allocation run guarantee a loading window allocation?
  10. How will allocations be documented?
  11. What is a certificate?
  12. Who is the issuer of the certificate?
  13. How are loading window certificates allocated?
  14. Is the allocation process anonymous?
  15. Does anonymity end at any point?
  16. Is there a fee associated with using an allocated loading window?
  17. What does the terminal service fee cover?
  18. Will a terminal services fee apply if a certificate holder decides not to take redelivery?
  19. Will a terminal services fee apply to a holder that sells its certificate?
  20. Will a terminal services fee apply if the certificate’s conditional loading rights are redeemed?
  21. Does the terminal services fee vary in amount from the time of allocation to loading?
  22. Does redelivered crude oil have to be of the same specifications as crude oil delivered under WTI Houston (HCL) futures contracts?
  23. Who is responsible for ensuring that only on-spec crude oil is redelivered to a buyer at Enterprise Houston Ship Channel?
  24. Who is eligible to participate in a Dock Allocation Run?
  25. Where do I find the onboarding package for the dock allocation process?
  26. When will allocations be run?
  27. How do participants express interest in a loading window?
  28. When will a participant know the number of available loading windows and the cost per barrel associated with a loading window?
  29. How many WTI Houston (HCL) futures contracts do participants need to deliver against their cargo?
  30. When do participants need to hold a futures position to use for delivery via a dock window?
  31. What else do participants have to do to use the certificate for loading a full cargo during an allocated loading window within a specified decade?
  32. How can a participant trade WTI Houston futures (HCL) contracts?
  33. What are a participant’s options if allocated a certificate for a loading window?
  34. Can the value of a certificate (and its specified loading window) change between allocation and the certificate’s date of expiration?
  35. Who can buy a certificate and its loading window off-exchange (“OTC”)?
  36. How does a participant submit the number of barrels within the acceptable range (650K-850K)?

1. What is the WTI Houston futures (Code HCL) Dock Allocation Run process?

The WTI Houston futures (HCL) Dock Allocation Run process allows participants to load a full cargo of light sweet crude oil (650,000 to 850,000 barrels) at the Enterprise Houston Ship Channel during loading windows that are allocated to allocation run participants.

2. What is the connection between WTI Houston (HCL) futures contracts and the Dock Allocation Run process?

With some exceptions, the crude oil that can be loaded onto buyer’s vessel at Enterprise Houston Ship Channel during the allocated loading window must be purchased under a front-month WTI Houston (HCL) futures contract. The buyer must take delivery at ECHO terminal under the WTI Houston (HCL) futures contract. Subsequent to taking delivery at ECHO terminal, the crude oil can be redelivered from ECHO terminal to buyer’s vessel at Enterprise Houston Ship Channel pursuant to the Dock Allocation Run process as further described below. 

3. Why are allocations of loading windows being offered?

The Dock Allocation Run process gives futures buyers the ability to efficiently use WTI Houston (HCL) futures contracts to take redelivery of crude oil by vessel at Enterprise Houston Ship Channel.

4. Is the Dock Allocation Run process a mandatory part of deliveries under WTI Houston (HCL) futures contracts?

No. The dock delivery mechanism is an optional feature of the delivery process for futures buyers. On a monthly basis, Enterprise Houston Ship Channel, L.P. (“EHSC”) will provide dock loading windows at Enterprise Houston Ship Channel, which the Exchange will randomly allocate for use to allocation run participants.

5. Is the allocation of loading windows during an allocation run completely random?

No. The allocation process is not completely random. This is because participants may express interest for one or more loading windows within any or all of the available ten (10) day loading periods, termed “Decades.” Loading windows will be allocated in accordance with these expressed preferences. 

6. How are “decades” defined?

A decade will generally be a ten (10) consecutive day period comprised of (a) the 11th through the 20th calendar days of the delivery month (second decade); (b) all remaining calendar days after the 20th calendar day of the delivery month (third decade); or (c) the 1st through the 10th calendar days of the calendar month following the delivery month (first decade).

7. How are “loading windows” defined?

Loading windows span two (2) consecutive calendar days. Loading onto a buyer’s vessel must take place within this two (2) day span. Therefore, within each decade, there could be up to five (5) loading windows available for allocation during an allocation run.

8. Are the specific dates of an allocated loading window fixed at the time of allocation?

No. Loading windows are allocated within one (1) of the three (3) specified decades. Although the decade is fixed and known at time of allocation, the consecutive two (2) day span that comprises the loading will not be fixed at the time of allocation. Rather, the exact dates will be fixed by EHSC approximately two (2) weeks prior to the WTI Houston (HCL) futures contract’s delivery month.  

9. Does participation in an allocation run guarantee a loading window allocation?

No. Some participants may not receive an allocation. This could occur, for example, because the number of participants is greater than the number of offered windows.

10. How will allocations be documented?

Participants that receive an allocated loading window will receive a Certificate, giving them the conditional right to use the loading window for loading a full cargo at Enterprise Houston Ship Channel. As noted above, the loaded crude oil (with some exceptions) must be purchased under a front-month WTI Houston (HCL) futures contract. 

11. What is a certificate?

The certificate is a document that gives its holder the conditional right to use the allocated loading window, or alternatively, to sell that conditional right to another party prior to the certificate’s date of expiration. 

12. Who is the issuer of the certificate?

The certificate is issued by EHSC, the owner of the dock space at Enterprise Houston Ship Channel.

13. How are loading window certificates allocated?

Participants who have a strong preference for a loading window within one decade over another should classify the higher priority decade as the “first-priority.” Note that certificates will be allocated in chronological order. Participants may choose both a first-priority and second-priority decade(s), while limiting the number of windows allocated to a maximum quantity.

Example –

Participant A wants to fill no more than one loading window for a January 2020 Houston WTI (HCL) futures contract. The participant prefers a second decade window but will accept a third decade window.

Participant A informs the Exchange through their clearing member that their first-priority is for one second decade window and their second-priority is for one third decade window. In this example, Firm A wants only one window.

If Participant A is not awarded a certificate in the first-priority run, they are eligible for a third decade window in the second-priority run.

If Participant A is awarded a certificate in the first-priority run, they will not be included in the second-priority run for a third decade window.

Participant A will not be allocated more than one window in any scenario and has no chance of receiving a first decade window. There is no guarantee that Participant A will receive any window in the allocation.

14. Is the allocation process anonymous?

Yes, the allocation run process is anonymous. The identity of allocation run participants and certificate holders will not be disclosed to EHSC or to any other allocation session participant or certificate holder.  

15. Does anonymity end at any point?

Yes.  In order to provide redelivery services, EHSC must eventually know the identity of a certificate’s ultimate holder. EHSC will only know the identity of the certificate’s ultimate holder (not the identity of allocation run participants or intervening purchasers and sellers of certificates) after the certificate’s date of expiration, which is approximately two (2) weeks prior to the front-month contract’s delivery month. At this time, participants must also execute a terminal services agreement with EHSC and submit a barrel nomination to the Exchange and in EHSC Estream in order to take redelivery of crude oil pursuant to a certificate.

16. Is there a fee associated with using an allocated loading window?

Yes. The allocated loading window can be used to load a full cargo at the Enterprise Houston Ship Channel for a fixed terminal services fee. The terminal services fee is fixed and known prior to the time of allocation and applies on a per barrel basis.

17. What does the terminal service fee cover?

The terminal services fee covers EHSC’s full provision of terminal services for the redelivery of 650,000 to 850,000 barrels of crude oil. The redelivery service includes the transportation of the buyer’s crude oil from ECHO terminal to Enterprise Houston Ship Channel for loading onto the buyer’s vessel.

18. Will a terminal services fee apply if a certificate holder decides not to take redelivery?

Yes. If the ultimate holder of a certificate holds the certificate through its date of expiration without using its conditional loading rights, the terminal services fee will become payable to EHSC directly under the terms of the certificate. Following the certificate’s date of expiration, the terminal services fee becomes due fifteen (15) days after the ultimate holder receives an invoice for the fee from EHSC.

19. Will a terminal services fee apply to a holder that sells its certificate?

No. If a certificate holder sells its certificate (and the conditional loading rights that the certificate represents), that holder as the certificate’s seller will have no obligation to pay a terminal services fee to EHSC at any time. The terminal services fee is payable only by the party holding the certificate on its date of expiration, not the certificate’s original holder or any intervening purchaser or seller of the certificate, all of whom would not be known to EHSC.

20. Will a terminal services fee apply if the certificate’s conditional loading rights are redeemed?

Yes. If a certificate’s conditional loading rights are redeemed on or prior to the certificate’s date of expiration and redelivery is taken, the terminal services fee becomes payable under the terms of EHSC’s terminal services agreement. Under the terminal service agreement, the terminal services fee becomes due after the completion of loading within ten (10) days following the buyer’s receipt of an invoice from EHSC.

21. Does the terminal services fee vary in amount from the time of allocation to loading?

No. The terminal services fee is applied on a per barrel basis. The per barrel fee is fixed and known at or prior to time of allocation. The per barrel fee will remain fixed thereafter and will not change throughout the process.

22. Does redelivered crude oil have to be of the same specifications as crude oil delivered under WTI Houston (HCL) futures contracts?

Absolutely. Crude oil delivered to a buyer’s account at the ECHO terminal and crude oil redelivered to a buyer at Enterprise Houston Ship Channel must at all times meet the same quality specifications as required for deliveries under WTI Houston (HCL) futures contracts.

23. Who is responsible for ensuring that only on-spec crude oil is redelivered to a buyer at Enterprise Houston Ship Channel?

EHSC is responsible for ensuring that on-spec crude oil is redelivered to a buyer at Enterprise Houston Ship Channel for loading onto buyer’s vessel.

24. Who is eligible to participate in a Dock Allocation Run?

Participants must be onboarded by NYMEX through their clearing member for participation in an allocation run. The onboarding process requires participants to be familiar with the applicable NYMEX rules and the certificate terms and conditions. Participants must also have the capacity for arranging redelivery of crude oil by vessel at Enterprise Houston Ship Channel.  

25. Where do I find the onboarding package for the dock allocation process?

26. When will allocations be run?

An allocation run will be scheduled for and conducted at 12 p.m. Eastern Time (ET) on the 15th day of the second month preceding the delivery month or the preceding business day if such day is not a business day.

27. How do participants express interest in a loading window?

Participants are required to express interest to the Exchange no later than 11:30 a.m. ET on the day of a scheduled allocation run through their clearing member.

28. When will a participant know the number of available loading windows and the cost per barrel associated with a loading window?

The loading cost per barrel will be fixed and posted along with the number of available windows in each decade approximately two (2) business days prior to the allocation run. The windows will be posted on CME Group’s deliveries landing page.

29. How many WTI Houston (HCL) futures contracts do participants need to deliver against their cargo?

The process is designed for participants to redeliver and load crude oil delivered under the front-month futures contract at ECHO for the complete cargo of 650,000 to 850,000 barrels. However, the Exchange may elect to allow participants to use off-exchange/physical supply to fill part of the cargo. If permitted, a participant must secure non-futures crude oil at ECHO and ensure that the crude oil meets the quality specifications outlined in the WTI Houston (HCL) futures contract.

30. When do participants need to hold a futures position to use for delivery via a dock window?

Participants are required to hold futures contracts only by the futures contract’s expiration date in order to use the allocated dock window(s) for redelivery, which is approximately one (1) week after a certificate’s date of expiration.

31. What else do participants have to do to use the certificate for loading a full cargo during an allocated loading window within a specified decade?

Prior to loading, participants must enter into a terminal services agreement with EHSC and register with EHSC through its EStream registration system. 

32. How can a participant trade WTI Houston futures (HCL) contracts?

Participants may execute WTI Houston (HCL) futures contracts electronically on CME Globex or, if eligible, as a block trade pursuant to the requirements of NYMEX Rule 526 (“Block Trades”). Block trades must be submitted to the Exchange via CME ClearPort.

33. What are a participant’s options if allocated a certificate for a loading window?

Participants that are allocated a loading window have three options:

  1. Use the certificate for loading a full cargo of light sweet crude oil in the specified decade (such crude will be initially delivered at ECHO against expired WTI Houston (HCL) futures contracts) with further delivery off-exchange at the dock in delivered quantities as required for dock deliveries;
  2. Sell the certificate off-exchange and transfer the loading window through an assignment of rights; or
  3. Allow the unused certificate to expire. Note that participants that allow an unused certificate to expire must pay the terminal services fee multiplied by the minimum number of barrels in the offered range.

34. Can the value of a certificate (and its specified loading window) change between allocation and the certificate’s date of expiration?

Yes. Similar to the existing market, the value of the loading window that is represented by a certificate may rise or fall with demand. Participants may elect to sell their certificate at a profit or loss to an onboarded firm to adjust for evolving market conditions. This is an OTC transaction and the selling price is not reported to the Exchange or EHSC. 

35. Who can buy a certificate and its loading window off-exchange (“OTC”)?

Only firms that have completed the onboarding process for participating in a Dock Allocation Run are eligible to purchase a certificate OTC from a certificate holder. However, there is no requirement for such firms to participate in an allocation run to qualify as an appropriate certificate buyer. Please contact NYMEX at clearinghousedelivteam@cmegroup.com to request a copy of the allocation onboarding package.

36. How does a participant submit the number of barrels within the acceptable range (650K-850K)?

Each certificate will include an expiration date that is approximately two (2) business days prior to the 15th of the month prior to delivery (approximately two weeks prior to the front-month WTI Houston (HCL) futures contract’s delivery month). In order to redeem the certificate, the holder must notify its clearing member of the size of the cargo within the prescribed range.

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