Thursday, October 8, 2009

Limits on commodities trading will challenge E&P companies looking to manage risk

Both the Treasury Department and the CTFC believe greater oversight of financial trading activities is needed to prevent future market turmoil. Position limits on finite commodities pose challenges for companies managing energy commodity risk exposure.

If enacted, one challenge would be the resulting effect on the availability of hedging counterparties. Simply put, increased margin requirements of exchange-based trading would decrease the number of counterparties.

Forcing transactions to clear on a more transparent exchange would mean companies would be forced to rely less on credit to support deals. Could that actually be a good thing for the industry in that it would reduce counterparty risk?

More factors facing companies are an increase in regulatory disclosure requirements, and expanded internal and external compliance oversight and reporting requirements.

If enacted, companies could end up spending millions increasing and enhancing reporting and risk infrastructure and activities.

There are still some major questions about how, if enacted, the new rules will evolve. Who would set the limits? The CTFC? Individual exchanges? Who, if anyone, should be exempt? At what level should the limits be set? How would the appropriate level be determined?

Do the benefits of a more transparent system in hopes of thwarting another market disaster outweigh the potential challenges faced by companies to adapt to the new rules?

I suspect that if the new rules were to be enacted in the current economic state, companies would take their transactions overseas and hedge risks elsewhere. Depending on the volume of companies looking for alternatives, would that then make the efforts of the Treasury Department and The CTFC moot? And what impact would that then have on the US market?


Anonymous george nyc said...

nice article - however, if europeans are also actively looking to tighter regulate exchange dealing, does it force the interest into the physical market then - possibly countering the overall reg effort?

October 22, 2009 at 11:34 AM  

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