It uses the median. The lowest price is only used to determine the excess collateral needed for the 3.5 day loan (it is a loan because the HBD is delivered immediately even though the rate is determined and the actual conversion can be said to occur after 3.5 days).

I misunderstood the mechanics of the conversion process. If we view it as a loan instead, then a fee is justified. I still think that it is a bit high (~2 percent would be better in my view), but that is just my opinion.