Companies involved in trading energy commodities are in limbo while the CFTC considers rulemaking required by the Dodd-Frank Wall Street Reform Act. The Act set a very aggressive schedule for rulemaking, with many rules expected to be issued by July 2011. IDC Energy Insights recently moderated a panel of compliance officers at Sungard's Houston City day on the topic of Dodd-Frank. All panel members agreed that new rules will have a major impact on what systems – people, process and i
It is clear that commodities market participants are not standing on the sidelines. In total, there are 31 areas where proposals are expected. According to Pauline McCallion in "What Dodd-Frank Means to Us", in EnergyRisk magazine, April 2011, as of April, the CFTC had received 3,500 comments on position limits, 170 comments on swap dealer definition, 70 comments on real-time reporting and between 10 and 20 comments on clearinghouses.
With all the complexity and comments, deadlines for rule-making are not expected to be met. On April 27, the CFTC approved reopening or extending the comment periods for most proposed rules for an additional 30 days. In the meantime, U.S. House Agriculture Committee members voted to advance HR 1573 which will delay the Dodd-Frank rules until the end of 2012. However, there are some provisions of the law that will go into effect on July 1 that do not require rule-making, so compliance officers at companies trading in energy commodity are getting ready, mostly with trader training.
For most energy companies, the big issues are in whether over-the-counter trades will be subject to margin and clearing requirements and how "real-time" reporting requirements will be. While there is an exception for companies that (1) are not financial entities; (2) use swaps to mitigate commercial risks (e.g., strategic companies using swaps as a hedge against commodity prices) and (3) notify the CFTC of the manner in which they intend to meet their financial obligations, it is not clear what will happen if there is a deal in which one of the parties in a deal does not meet the exception rules. Swaps data will be collected into a swaps data repository (SDR) and market participants may be required to time stamp data at various points in the transaction.
Compliance officers represented on the panel are at various stages of getting ready with the assumption that new processes and IT will need to be up and running quickly. Panelists are investigating what would need to modified or changed with existing systems to accommodate:
- Handling position limits
- Capture of additional data in deal capture applications to meet compliance obligations
- Archiving and retention of e-mail and possible telephone tapes of traders
- Real-time reporting
- Differences in regulation for companies that are involved in markets outside of the United States.
The CFTC is getting ready too. According to Peter Marrin in an article in SNL Energy on May 5 - SNL Energy, Gensler defends CFTC budget; Dodd-Frank delay bill advances in House, last year the CFTC used about 18% of its budget, or $31 million, on technology initiatives and the continuing resolution requires that $37.2 million goes toward technology in fiscal year 2011. Under Obama's fiscal year 2012 budget, the earmark for technology jumps to $66 million. There is a good chance that much of the technology investment will go into market monitoring.
IDC Energy Insights see a role for business analytics in this area as well. For example, one trading company in Europe decided to stand up a computer model that would run in parallel with activities during the trading day. In a snapshot of time, the model recommends, based on prices and portfolio, what should the end position be. At the end of the day, the simulated and the actual trading and positions are compared to provide lessons for traders about opportunities that they might not have been exploiting, such as a conversion between high and low quality gas. The same analytics can be used to assess trader behavior relative to compliance and business strategy.