Turbulent economic conditions combined with stringent and uncertain regulatory reform are bringing dramatic changes to the face of energy and commodity credit risk. Don’t just cross your fingers and hope a catastrophe won’t happen to your organization.
Triple Point recently hosted a webinar on The New Rules of Counterparty Credit Risk and how you can prepare for potential economic & regulatory pitfalls with a flexible and transparent credit risk system.
In case you missed the live webinar, here is a link to download the webinar and view at your convenience.
In this webinar, Triple Point’s Vice President, Credit Risk Division, Dan Reid, discussed how Triple Point’s Commodity XL for Credit Risk™ will safeguard against counterparty credit risk failure and growing regulatory demands. Attendees learned how our solution will deliver an ROI to their business through liquidity savings and business expansion, how to reduce reliance on credit rating agencies, the impact of Dodd-Frank, Markets in Financial Instruments Directive (MiFID) and Market Abuse Directive (MAD) on credit risk management, and more.
To learn about the implications of market volatility and financial reform on credit risk, and how you can safeguard against counterparty credit risk failure, download the webinar below.
Triple Point announced today the availability of Commodity XL for Dodd-Frank: End User Exemption™. The compliance solution is designed to ensure that organizations comply with Dodd-Frank rules for validating hedging programs in order to avoid central clearing and additional margin requirements.
Dodd-Frank will require that all OTC trades be centrally cleared but exempts companies that trade to mitigate their commercial risk. Commodity XL for Dodd-Frank: End User Exemption enables the exemption process for each hedge, allowing companies to protect their hedging programs and ensure that valuable working capital is retained.
Triple Point’s compliance solution manages the exemption process on a hedge by hedge basis. Key functionality of the product includes a complete audit trail of hedging activity, effectiveness testing, and automated documentation and disclosure management. Commodity XL for Dodd-Frank: End User Exemption will be continually updated as regulations evolve.
“The business impact of failing to get Dodd-Frank end-user exemptions for bona fide hedges starts with increased margining but ultimately ends with hedging programs becoming too expensive to maintain. This puts organizations at risk of an increasingly volatile market,” said Michel Zadoroznyj, VP, treasury and regulatory compliance, Triple Point. “There are better uses of capital than having it sit in margin accounts. To ensure exemptions, organizations need to have the right software solution in place.”
For the third year running, top analyst firm Gartner has named Triple Point as a ‘Leader’ in trading & risk management. Among Triple Point’s many core strengths, Gartner stated that Triple Point continues to offer the most comprehensive FASB compliance solutions.
Are you prepared for the sweeping regulatory changes brought on by the Financial Reform Bill? The new financial reform law is not isolated to just banks and will dramatically alter the landscape of energy and commodity trading and hedging.
Triple Point recently hosted a webinar on the Dodd-Frank Act and what you can do now to prepare for the new regulatory requirements. In case you missed you live webinar, here is a link to download the webinar and view at your convenience.
In this webinar, Michel Zadoroznyj, Vice President of Product Center, Treasury and Regulatory Compliance Division at Triple Point, discussed how the Dodd-Frank Act will impact the future of energy trading, who will be affected by the new rules and the implementation timeline. Additionally, all attendees learned 8 steps to ensure you have the IT and reporting infrastructure in place to handle new rules on position limits, central clearing, margining and more.
To hear the 8 Steps to Prepare for the Dodd-Frank and learn more about the sweeping regulatory changes, download the webinar below.
Credit departments manage billions of dollars of capital and provide a system of checks and balances on company risk, but are chronically under funded and lack regulatory support to provide proper oversight. In the rush to make a quick buck, organizations often fail to invest the time and energy they should to constantly re-evaluate the strength of their policies and procedures and ultimately conduct business in a way that ensures long-term prudence and prosperity. Even with recent financial reform regulatory actions under the Dodd-Frank act, no person, department or governmental compliance effort can totally prevent all errors, misrepresentations, or deceptions. It is essential that organizations have their own enterprise credit risk management policies in place to provide transparency and to help ensure compliance. This market perspective presents a number of timely approaches for potential improvements to the regulation and administration of credit risk management issues.
Automated Collateralization / Margining
The International Swaps and Derivatives Association, Inc. (ISDA) recently conducted its 2010 ISDA Margin Survey. Over the last ten years, the number of executed collateral agreements has grown from 12,000 to over 170,000, with the estimated amount of collateral in circulation growing from $200 billion to over $3.2 trillion, and 83% are bilateral. Much of the tracking and application of collateral (and its expiration) is still conducted in spreadsheets, with the potential for manual error and/or incorrect calculation. This can lead to the belief that credit reserves are adequate when they’re not, or increased trading that is not supported by accurate and enforceable risk-mitigation provisions. Automation and audit-ability of the recording, maintenance, and calculation of collateral and margining is critical to meet the growing demand. Under Dodd-Frank, evolving requirements for minimums, timeliness, and collateral type will likely increase. Investments in this area support the business and help to avoid the next company going down because it couldn’t meet liquidity demands.
Credit Rating Agency Independence
Similar to auditing, paying a company to review your own business and provide a rating can represent a potential conflict of interest. And yet, critical decisions on billions of dollars of investments and contingent collateral requirements are based on those same ratings. If you look to the consumer sector, where credit bureaus like TransUnion, Equifax, and Experian provide FICO credit scores, revenue comes from the requestor of the score—individuals do not pay for their own evaluation. Even with the 2006 Credit Rating Agency Reform Act and the SEC implementation in 2007 of the Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Rating Organization, NRSRO’s still rely on an “issuer-pays” business model. These ratings are too important to take a chance– a subscription-based model would provide significant independence. Recent reforms mandated by the Dodd-Frank act (Title IX, Subtitle C) look to address the oversight and regulation of rating agencies, but it is still unclear how far and deep the changes will go. Market leading organizations will pay close attention and provide comments to the rule making process to ensure reform delivers comprehensive, sustained results.
Although in its early stages, European Financial Reform is rapidly developing. There are challenges unique to the European Union in terms of jurisdictional complexity that make Dodd-Frank look like a stroll in the park. Providing regulatory oversight without stepping on nationalist toes will be some trick indeed.
In spite of the obvious obstacles, the EU is moving forward. In December the European Parliament moved legislation that created the European Systemic Risk Board. The ESRB is part of the European System of Financial Supervision (ESFS), the purpose of which is to ensure the supervision of the Union’s financial system. The ESRB closely resembles the Financial Stability Oversight Council, which was created by the Dodd-Frank Act. It will be responsible for the macro-prudential oversight of the financial system within the EU in order to assist in the prevention or mitigation of systemic risks to financial stability in the EU.
This month, the European Parliament established three new European Supervisory Authorities: the European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational Pensions Authority. These are the guys that will be setting the technical standards for financial institutions. They will work very closely with the ESRB in laying the groundwork for the new regulatory policies. One key stipulation that the ESAs must abide by is that they must ensure that no decision impinges on the fiscal responsibilities of EU member states. I can see situations arising where a national interest and a rule issued by an ESA may be at odds. One wonders what the reconciliation process will be like.
In order for these newly established entities to be effective the EU will need to come up with joint data standards. Data standards across national supervisory bodies have long been considered a kind of Achilles’ heel for the EU. With 27 member states, it will be interesting to see how the data standards develop – I can’t get my family to agree on lunch.
What About Derivatives?
Regarding the regulation of derivatives we see the European Commission proposing rules similar to those seen in Title VII of Dodd-Frank. Through the MiFID (Markets in Financial Instruments Directive) revision proposals we see the central themes of greater transparency, central clearing and reduced operational risk clearly taking shape.
European entities will be subject to mandatory reporting of OTC derivative trades to central data centers. Very much like its US counterpart, the Swap Data Repository, the trade repository will collect position information by derivative class and publicly disseminate the information. It will be the responsibility of the European Securities and Markets Authority to govern these repositories.
Very much like in Dodd-Frank, over-the-counter derivatives that can be cleared must be cleared through central counterparties. Eligible transactions will include those that are standardized or that possess a high level of liquidity.
The European Commission’s proposal strongly promotes the use of electronic means for the timely confirmation of the terms of OTC derivatives contracts as a means of reducing operational risk. Entities should develop and maintain an organizational structure, internal controls and a reporting system suitable for the identification, assessment, control and monitoring of operational risks in market-related activities.
Prompted by the 2009 G-20 agreement that stated – “all standard OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest”, the European Commission has made it clear that it intends to stick to that time frame.
We will be watching these developments very closely.
Attempting to cope with the ambitious time lines demanded by the Dodd-Frank Act, the CFTC went into high gear in December by promulgating 10 new rules. That put their total to over 40 rules related to DFA in five-month time span. To put this into perspective, prior to Dodd-Frank, the CFTC’s rulemaking averaged to only a little over 5 per year. The merits and faults of the rapidity of the CFTC’s rulemaking process has been the subject of many debates, but under current law, the deadlines stand and must be met.
December Proposed Rule Highlights
I won’t go into each and every rule that was proposed in December, but rather would like to highlight a few that I would consider very important. No, I’m not trying to trivialize the others; I just believe there are a few that are really high on many watch lists.
The Players Defined
How an entity is categorized will ultimately determine their specific regulatory requirements. Although Title VII of the Dodd-Frank Act provided basic definitions for Swap Dealer, Major Swap Participant and Eligible Contract Participant, it charged the CFTC and SEC to further define these entities.
Are You a Dealer?
The Swap Dealer definition did not really stray from what the legislators proposed. The
- Swap dealers tend to accommodate demand for swaps from other parties;
- Swap dealers are generally available to enter into swaps to facilitate other parties’ interest in entering into swaps;
- Swap dealers tend not to request that other parties propose the terms of swaps; rather, they tend to enter into swaps on their own standard terms or on terms they arrange in response to other parties’ interest; and
- Swap dealers tend to be able to arrange customized terms for swaps upon request, or to create new types of swaps at their own initiative.
If you meet the criteria, you’ll be required to register as a swap dealer. The proposed rule will permit an application to be designated as a swap dealer with respect to only specified categories of swaps or activities. So, being a swap dealer in one category of swap does not mean you are considered a swap dealer in other categories.
Pertaining to the definition of a Swap Dealer, the CFTC also established a De Minimis exemption as instructed by the DFA. In order to avoid the Swap Dealer classification an entity must satisfy all the following conditions:
- The aggregate effective notional amount, measured on a gross basis, of the swaps that the person enters into over the prior 12 months in connection with dealing activities must not exceed $100 million.
- The aggregate effective notional amount of such swaps with “special entities” (like governments) over the prior 12 months must not exceed $25 million.
- The person must not enter into swaps as a dealer with more than 15 counterparties, other than security- based swap dealers, over the prior 12 months.
- The person must not enter into more than 20 swaps as a dealer over the prior 12 months.
CFTC Chairman Gary Gensler stated that it wasn’t the intent to capture end users in the definition of swap dealers and felt that was reflected in the commission’s definition. Commissioner Scott D O’Malia brought up concerns in the energy market and whether entities currently categorized as producer/merchants will fall into the swap dealer category as a result of the rulemaking. The Commission admitted to not possessing a clear understanding of the complexity of the physical energy markets. The Commission is seeking comment from the energy sector to gain an understanding of factors that could influence the swap dealer definition.