09.07.2011
By Terry Flanagan

Dodd-Frank Uncertainties Vex Energy Markets

Rules could force trading firms to post margin on swaps.

New requirements from Dodd-Frank will force participants in the energy markets to cope with a staggering amount of change.

“Being that the rulings are long time coming, and vague at best in some areas, it’s hard to mitigate the risk this would propose for such participants,” Sean Carnahan, global director of commodities and energy at SuperDerivatives, told Markets Media “Utilities were sectioned out as not being included in such rules, but the risk and possible serious problem of cash flow at risk are still pending.”

The rules being proposed and passed by the regulating authorities of CFTC and SEC will impact all energy market participants.  “The concerns are high regarding an energy company or trading firm possible additional costs that would result from the law,” Carnahan said.

“In the case of utilities that use OTC swaps primarily to manage volatility in pricing, the regulations could force such participants to post margins on these swaps,” he said.  “This would directly affect an individual utility’s cash flow to the tune of hundreds of millions per year.”

The impending regulations demanding organized trading have boosted demand to automate this complex corner of the trading market.  In response, SuperDerivatives has rolled out NAV Lite, which provides an approximation of the settlement price at an earlier time in the day, Carnahan said.

“Through using NAV Lite, a client can now approximate the settlement prices of the OTC and cleared options earlier in the day than the published exchange,” said Carnahan.

NAV Lite uses a unique extrapolation of the exchange traded options to create an approximation settlement price, he said.  The broker/dealer gets an agreed price and sends to a prime broker.  The positions at the end of the day are then sent to NAV Lite.

“The extrapolation is then created and a settlement price is provided by 5:15 p.m.,” said Carnahan. “The numbers are sent to the hedge fund administrator earlier and follow up threshold/recon reports and settlement prices are sent at 7:45 p.m.”

There will be demands on proving the intent of a swap in order to qualify it for clearing or not, which will impact their overall hedging and operations.

“If the systems, data, and record keeping and reporting are not in line with the new demands of transparency, they would be prudent to get them into place now to avoid possible fallout from not meeting requirements,” Carnahan said.  “All swap participants, from dealer to end user, should be acutely aware that the impending situation around swaps is that all swaps will need to be documented and reported,” Carnahan said.

In the case of utilities that use OTC swaps primarily to manage volatility in pricing, the regulations could force such participants to post margins on these swaps.  This would directly affect an individual utilities cash flow to the tune of hundreds of millions per year.

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