Commodity Management Blog

Innovative Ideas and Thought Leadership for Volatile Commodity Marketplace

Change Ahead SignGeorge Carlin once told a great story about how he “put a dollar in one of those change machines and nothing changed.”  Wouldn’t it be nice if we could control change.  In today’s volatile world we never know when to expect it, where it will come from or what it will bring ­- we just know it’s coming.

The Dodd-Frank Act, the most sweeping financial reform since the 1930’s, is coming and it will bring dramatic changes to the face of energy and commodity credit risk.  New rules on central clearing, position limits and margining have the potential to significantly increase the cost of hedging and reduce the availability of credit.  Many of the details are still uncertain, but the 5 simple rules below will help you prepare for the Dodd-Frank Act and other inevitable changes.

  1. Internal Scoring.  Don’t rely solely on credit rating agencies.  Your own internal model can be more accurate.
  2. Monitoring.  Monitor your cash flow risk and exposure. Increasing capital requirements make it more important than ever to mitigate risk and seize opportunity.
  3. Margining.  Do not use spreadsheets for collateral management. Robust collateral management is now a necessity. If you have a significant number of counterparties, it is time to eliminate spreadsheets. With the proliferation of margining they are no longer adequate and cannot provide active and accurate cash management.
  4. Reporting.  Build flexible reporting infrastructure that prepares for today’s uncertain fiscal and regulatory environment.
  5. Analytics.  Perform liquidity analysis with analytics. Companies who understand the impact of capital and margin requirements on their liquidity will have a competitive advantage.

We can’t control change, but proactive companies with a flexible trading and risk infrastructure will be best prepared to avoid the pitfalls and take advantage of the new opportunities that come with change.  Is reporting cash exposure a piece of cake? Do you know without a doubt your IT systems will meet new regulations? Is your margining process working great for you?  If not, maybe now is the time for change.

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