08.18.2011
By Terry Flanagan

FinReg Transforms Energy Markets

The Dodd-Frank Act is having an impact on the energy trading markets even as—or especially because—its implementing regulations are still being drawn by the SEC and CFTC.

Uncertainty about how FinReg’s provisions on clearing and execution of OTC derivatives will be implemented is having a salutary effect on providers of energy trading systems.

“We see a lot of question and concern about what changes Dodd-Frank will impose on our clients’ operations and our clients are largely looking to us for solutions,” Jacob Pechenik, president and CEO of YellowJacket, told Markets Media. “We intend to offer Dodd-Frank-friendly solutions that will ensure our clients’ compliance with the new regulations while minimizing disruptions to their business workflows.”

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

“What is driving demand for SunGard’s Kiodex is that we not only will enable our clients to comply with the new requirements but also offer a solution that helps our clients gain an advantage in this new environment,” said Kirk Howell, chief operating officer of Kiodex, part of SunGard’s energy and commodities business. For example, Kiodex’s clients can monitor their risk and positions in real time as advised by the CFTC.”

Kiodex’s solution also understands the relation among positions across products and exchanges. “This built-in relational intelligence will allow the flexibility to comply with the forthcoming position limits of Dodd-Frank, but also gives our clients a system that intuitively groups similar risk and spot problems quickly,” said Howell.

Under a proposed rule by the CFTC, spot-month position limits will be set at 25 percent of deliverable supply for a given commodity, with a conditional spot-month limit of five times that amount for entities with positions exclusively in cash-settled contracts.

Conditional spot-month limits have been in place in the natural gas market since 2010; the proposed rule would extend the policy to all physical commodities.

CME Group and InterContinental Exchange are skirmishing over the conditional limits rule.

CME, in arguing that the conditional limit be decreased or eliminated, cites data that its says demonstrates that since the conditional limits were introduced in the natural gas market in Feb. 2010, trading volume has decreased in the physically-delivered Nymex natural gas futures contract (NG) in the critical 30-minute settlement period on the last trading day.

ICE, in response, said that CME’s analysis is materially flawed and that in the 17 months since the conditional limit provision went into effect, natural gas prices have been lower and less volatile than historical levels.

Removing or reducing the conditional limit would disrupt market practice for sole purpose of enhancing CME’s competitive position, ICE said. ICE cited data that it says refutes any suggestion that the existence of the conditional limited resulted in increased volume in the ICE Henry Hub Swap at the expense of volume in the Nymex NG contract curing the 30 minutes prior to contract expiration.

YellowJacket, a subsidiary of InterContinental Exchange, operates an electronic trade negotiation platform through which traders can aggregate and consolidate instant message-based communications and key transaction details on a single screen.

YellowJacket’s quote recognition technology extracts data from individual IM conversations and consolidates it so it can be viewed on a single screen.

“Demand continues to be predominantly driven by our customers’ need to be efficient and competitive,” Pechenik said. “We make it possible for our clients to leverage market data along with their analytic systems in markets where the majority of the volume is quoted/traded over instant messaging rather than electronic venues.”

Dodd-Frank will further increase the number of trades cleared and margined. “In a future with rising interest rates, collateral management can be a competitive advantage with the right tools,” said Howell. “Kiodex enables our clients to see their margin in real time so that they can optimize their positions and margin before the end of the trading day.”

Related articles