Commodity Traders Behind Compliance Curve As Dodd-Frank Rears Into View

Terry Flanagan

Commodity trading firms are ramping up compliance activities ahead of scheduled implementation of Dodd-Frank Act rules.

Final rules for Dodd-Frank Title VII, the section dealing with financial swaps and hence commodity markets, were published in the summer of 2012.

Under the timeline established by the publication, new position limits regulations were scheduled to go into effect in October—although these were subsequently blocked by a court ruling—with swap data reporting regulations set to be enforced on January 1, 2013 for swap dealers and major swap participants.

While companies affected by these regulations are starting to move into high gear with compliance, results so far have been mixed.

According to a survey of oil and gas trading companies, utilities and hedge funds conducted by research firm CommodityPoint, many market participants have made little progress in developing compliance processes.

“Given these aggressive deadlines, it would be expected that market participants would undertake an equally aggressive program to ensure compliance—including such activities as swap data repository (SDR) onboarding, connectivity and testing; restructuring of internal processes to ensure proper data retention and reporting; and technology infrastructure changes,” said Patrick Reames, managing director at CommodityPoint.

“In reviewing the data, however, there appears to be a general lack of urgency on the part of many market participants—with few resources assigned to compliance efforts, and little engagement with third parties that could provide expert opinions or technology solutions.”

However, that is likely to change as the regulations come into force.

“The Dodd-Frank Act is top of mind, and to some degree we are seeing a panic, with a rush to get technologies in place and get processes upgraded,” said Charlie Sanchez, executive lead for energy risk at SAS RiskAdvisory, which provides commodity trading and risk management solutions.

In the long run, though, any compliance effort should pay dividends in the form of a more tightly-knit risk culture.

“Dodd-Frank has created the opportunity to resolve the ambiguities that have arisen in terms of calculating market and credit risk across the enterprise,” said Sanchez.

“[Historically], there have been a lot of silos created around commodities, geographies and asset classes. There’s a pronounced shift under way towards aggregating risk at the enterprise level.”

In September, SAS RiskAdvisory announced that public utility company Xcel Energy had selected SAS BookRunner, which helps firms manage multi-commodity portfolios, to help it meet new compliance obligations for commodity swap market participants under Dodd-Frank.

Risk management for power plant fuel procurement involves the commodity swaps market, which is now regulated under Dodd-Frank Title VII.

Xcel Energy operates multi-state generation facilities fueled by coal, oil, gas and other commodities, and is making plans to respond to the new regulations.

SAS BookRunner will enable the Minneapolis-based electric and natural gas utility to minimize disruption to its commodity trading and risk management practice while meeting its Dodd-Frank compliance obligations, according to SAS RiskAdvisory.

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