Energy Markets Cope With Regulations

Terry Flanagan

Use of analytics can boost decision making and risk management.

Energy and commodity markets are adjusting to the new realities of regulation of the OTC derivatives markets.

While the energy and commodity space today is not accustomed, and largely unequipped, to monitor and report in real-time in response to Dodd-Frank requirements, the sector can learn from financial industry’s experience.

Regulatory compliance represents a mandatory investment, but can also become a means to extract great business value through the use of analytics for enhanced decision-making and risk management.

“The simple fact is that swaps, collateral or otherwise, are a major part of the market,” said Louis Caron, executive lead at SAS RiskAdvisory.

While swaps may contribute to systemic risk, the transparency that is afforded by moving swaps onto an exchange could have the function of decreasing systemic risk, since regulators have the ability to track them.

“Futures are regulated on exchanges by the CFTC, which means if someone takes a massive futures position, the phone starts ringing,” Caron said. “Meanwhile the OTC market has remained opaque, and regulators have been trying to change that.”

RiskAdvisory provides advisory services to energy and commodity market participants affected by the Dodd-Frank Act regulatory requirements. As regulatory harmonization occurs in Europe and Asia, the company is also addressing the business impacts of new rules outside North America.

“Swaps behave like a fixed-price natural gas trade, an option or any other transaction,” said Caron. “Yes, they have different features and attributes to track in the system, but you still need to track their valuation day-to-day and include them in your exposure reports to counterparties. So in terms of the reporting burden on the customers who use our technology, this should fit in with their current best practices.”

RiskAdvisory encourages risk managers not to wait on preparing their systems to comply with Dodd-Frank, regardless of the uncertainty that remains in the rulemaking process.

“It’s a hefty data collection and reporting issue for companies in the commodities markets,” said Caron. “Our approach to Dodd-Frank compliance has minimized the impact on a firm’s daily business processes, but the reality is that companies will need time to implement a compliance solution, whatever it is.”

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