Sunday, October 31, 2010

"FuelFix Q&A: Why energy traders are slow to adapt to rule changes"

An area we take a special interest in, see links below.
From the Houston Chronicle's FuelFix blog:
New rules from the latest round of financial market regulations could dramatically change energy trading — yet many firms are moving slowly to adapt, according to a study by software provider NICE Actimize and law firm Fulbright & Jaworski.
Of the energy trading representatives polled, none thought enforcement actions were going to drop-off as new CFTC rules kicked in and the impact of the Dodd-Frank Act is felt.
But in the face of increased scrutiny from regulators, more than one-quarter of the respondents said their organizations don’t have enough staff and resources to comply with the new rules. Read the full survey here.
We asked the Actimize team (who just so happen to sell systems that do automated compliance) to talk more about what’s coming for energy traders. Excerpts are below.
When the new CFTC rules kick in, what will a trader (say, gas futures trader) find different about his or her job?
Traders may be surprised to learn that regulators may already have better compliance surveillance systems than they have now. In addition:
  • The CFTC is looking to install hard position limits, rather than the limits currently managed by the regulators such as the CME and ICE
  • The CME and CFTC currently monitor intraday position limit violations
  • The remaining CFTC impacts are generally Dodd-Frank related
How will Dodd-Frank change things?
Firms must begin to prepare now or they will not be able to keep up with the ever0increasing regulatory requirements that are the reality of the post Dodd-Frank era. Some examples:
  • Swap transactions will need to be reported to a central public data manager
  • Swap transactions will need to be reported within 15 minutes of execution
  • Public power, state, local and federal counterparties may have a “duty of care” attached to them — meaning a trader has the obligation to give them a “fair price”
  • There is a new whistleblower program in energy trading with a “bounty” for employees who turn their company in – and they can go to the feds first
  • The CFTC may implement “cross market” positions – accumulating futures and look-alike swaps in one position limit
  • The CFTC has new market oversight powers that allows for expanded enforcement actions
  • Each trade will be required to have a hedging purpose for hedge exemptions from position limits
Why do so few of the companies monitor intraday activity and why does that matter?...MORE
See also:
The man who lost $6 billion (Brian Hunter, Amaranth)
(many links)
Saracen Attempts the Reverse Amaranth and...Yes!... Sticks the Faceplant Landing!

Brian Hunter, Natural Gas and Enron

And scariest of all, here's a meeting on cap-and-trade where the man from Enron is the smartest guy in the room:

From "Climateer Investing on Carbon Trading and Traders":
I'm sure long-time readers have gotten tired of seeing these two quotes:
"I don't know if climate change is caused by burning coal or sun flares or what," said the Moscow-based carbon cowboy. "And I don't really give a shit. Russia is the most energy inefficient country around, and carbon is the most volatile market ever. There's a lot of opportunity to make money."
The whole reason for the existence of traders is to make as much money as possible, consistent with what's legal...I lived through this: if you didn't manipulate the market and manipulation was accessible to you, that's when you were yelled at.
-New York Times, May 8, 2002