Fireworks and Debates in the Regulatory and Risk World
I had the distinct honor of attending the Energy Risk Asia conference held in Singapore on September 26. The conference brought together risk managers, commodity traders, procurement officers, quantitative analysts, and exchange personnel from the energy industry, and, of course, data and analytics solution providers together for one day of intense presentations and industry roundtables.
Arguably the most important roundtable discussion was on the esoteric topic of new regulatory requirements for OTC clearing. Since risk is the name of the game at this conference, the panelists held a lively discussion on the unintended consequences of OTC regulatory reforms enacted after the disastrous market crash of 2008. Chandra Dev Singh, Head of Derivatives from Bharat Petroleum, gave anecdotal evidence that companies are required to file paperwork even as regulatory bodies around the world admit they won’t initially have the capacity to study each submission. This unintended consequence is dampening OTC trading and driving traders to switch to equivalent futures products – a trend dubbed ‘futurisation’ (TheTradeNews.com). This trend was confirmed by panelist Jennifer Ilkiw, Vice President of ICE Asia Pacific who saw ICE futures volumes grow significantly the past few years.
As seen in Figure 1 below, an analysis of Brent Bullet Swap contracts on NYMEX built in the ZEMA Suite shows this concept that the volume of future settlements greatly outnumbers OTC settlements. The average volume of OTC settlements over the past 12 months was 180, whereas the volume of futures settlements averaged 359.
From the discussion of futurisation, I asked the panel the question close to my heart – What about data validation? Who is legally responsible for ensuring the data used to generate regulatory reporting is valid and correct, the exchange or the trading company? Ilkiw replied firmly that each company is responsible for the accuracy of the information it provides for regulators; ICE simply compiles and delivers that information. Existing ZEMA clients can already automate their forward curves; now they can use our Dodd Frank solution to automate their regulatory paperwork too. (To learn more about the Dodd Frank regulation, see our suggested solution here).
The lively debates provided a snapshot of two major industry-wide energy risk trends: 1) the real and ongoing futurisation (TheTradeNews.com) of prior OTC markets due to new OTC regulations and 2) the Benchmark wars caused by growing stature of Asia energy demands potentially requiring a new Asia crude benchmark. We’ll discuss the second debate and the new Asian Crude Oil Benchmark in Part 2 of this blog, Oil Benchmarks: What Works Best For Asian Markets?
Futurisation to escape new OTC regulatory burdens is an obvious solution for industry participants to reduce their OTC risks. However Energy Risk panellists have speculated this new flood of capital into futures causes risks of its own for the participants – by overburdening the futures monitoring agencies – akin to swimmers in a busy pool supervised by overworked lifeguards. But that, too, is a topic for another time.