Like he has dozens of times over the past two years, US Commodity Futures Trading Commission Chairman Gary Gensler this week extolled the benefits of his agency’s intense efforts to reform US swaps market.
“As of October 12, the new era of swaps market reform began,” Gensler said in a speech to a Futures Industry Association conference in Chicago, delivered Thursday by video due to travel troubles following Hurricane Sandy. “This will lead to significant benefits for the public. It also presents opportunities as well as challenges for market participants.”
During the conference, CFTC Commissioner Scott O’Malia, a Republican and frequent critic of the CFTC’s swaps reform rulemaking process, had less kind words for the start of this new era. It was a “train wreck,” he told Reuters.
Rather than praising or panning these new reforms, many energy firms remain in a state of befuddled flux, with risk managers still wondering if some of their physical market transactions will be defined as swaps and subject to new, potentially costly regulations, or even when new reporting and recordkeeping requirements will begin.
“We’ve done a lot of analysis and preparation to try and make sure that we comply with all the requirements, interpret them correctly and manage the best we can for our customers,” said Patrice Gorton, a risk manager with Avista a Spokane, Washington-based electric utility. “There’s just not enough clarity there and it makes it challenging for businesses.”
The Dodd-Frank Wall Street Reform and Consumer Protection Act was aimed at increasing transparency in swaps markets and subjecting the majority of the shadowy market to regulation for the first time. But more than two years after President Obama signed it into law, it’s unclear whether the law has had any impact on these markets.
“It really remains to be seen what the impact of all this is going to be,” said Tyson Slocum, director of the energy program at Public Citizen, a Washington-based government watchdog group that pushed for far-reaching reforms in the wake of the financial crisis. “Not enough of Dodd-Frank has been implemented, and there’s so much uncertainty now.”
At the same time, energy firms remain uncertain just how their energy trading will be affected going forward, according to more than a dozen lobbyists, lawyers, energy company executives and academics who were interviewed for this story.
One executive with a multinational oil and gas company said energy firms still don’t know which derivatives transactions will be subject to the Dodd-Frank-inspired rules that the Commodity Futures Trading Commission is scrambling to complete by the end of the year. Many firms don’t even know when the rules will take effect, this executive said.
So far, the uncertainty over what the new regime will ultimately look like has kept significant change at bay in derivatives markets. But Sanjeev Joshipura of the Commodity Markets Council, a Washington-based industry group, said some market players — particularly gas and oil hedgers — are bracing for a big shift, and may be eyeing markets in Asia and Europe where the rules are seen as more relaxed.
“There’s not one rule, there’s several rules that could impact the markets, and the markets are bracing for their impact,” Joshipura said. “Given the uncertainty and given the lack of scheduling, I think the industry has done what they could do to prepare. I don’t see them, right now, as being fully prepared to withstand the regulatory increase in activity that will come into effect shortly.”
Energy firms are still wrestling with several pending rules and regulations, including:
–The imposition of federal position limits in crude oil, natural gas and 26 other commodity contracts, which many experts argue would have more impact on the energy markets than any other mandate in Dodd-Frank. But CFTC’s position-limits rule was delayed indefinitely last month when a federal district court in Washington struck it down, siding with two Wall Street lobbying groups that argued that the mandate was not necessary. It’s unclear if CFTC will appeal the court’s decision or craft another rule, but either way, federal position limits are unlikely in commodity markets for at least a year, according to Paul Pantano, the head of the energy and commodities group at Cadwalader, Wickersham & Taft.
–CFTC has yet to finalize its new margin and capital requirements for swaps, potentially the costliest of the new rules, since it will dictate how much money firms will have to put aside to support their activities in the market.
–Clearing rules have been delayed and the majority of reporting rules are months away, but firms are already spending tens of millions of dollars to upgrade their systems to comply, sources told Platts.
–The Volcker rule, which is named after former Federal Reserve Chairman Paul Volcker. This measure, which was meant to prohibit big banks from proprietary trading, was supposed to be in place in June, but has been stalled for months by regulators. The rule is expected to have a severe impact on energy trading by banks.
–CFTC has yet to finalize rules over swap execution facilities, where the majority of swaps trading is expected to migrate once the regulatory regime is in place. Perhaps most pressing is a rule that would require 85% of a contract’s trades to be executed on an electronic exchange in an effort to boost price transparency. The rule, which remains in flux, could spell the end of hundreds of illiquid energy swaps, sources claim.
–The Securities and Exchange Commission has finalized a rule requiring publicly traded US oil and gas companies to report payments made in overseas energy projects, but the American Petroleum Institute, a Washington-based trade group, has sued to overturn it.
–CFTC has raised a lower, $25 million threshold for swaps dealing with municipal and state-owned utilities to $800 million, essentially allowing market participants to act as counterparties with these utilities without being classified as swap dealers. However, businesses are scrambling to monitor this and other limits to make sure they are not classified by regulators as “dealers,” subjecting them to new costs and stricter regulations.
–CFTC has unveiled a proposal to keep most transactions in wholesale electricity markets from being subject to new derivatives reform rules, but the Federal Energy Regulatory Commission has criticized it as unnecessary and burdensome. CFTC has yet to finalize this proposal.