Mr. Daugherty answered a series of questions written by marcus evans before the upcoming 4th Annual Risk Management in Energy Trading Conference, November 8-9, 2011 at the Hotel Derek in Houston, TX. All responses represent the view of the Mr. Daugherty and not necessarily those of BOK Financial. (Note that the responses have been approved by BOK Financial.)
What can companies be doing now to prepare for the Dodd-Frank Act?
SD: There a few things that a company can be doing right now to prepare. These can include:
1. Consult their financial services companies (lenders, hedge providers) and learn how they will treat hedge products differently – be sure to ask about margin requirements and ask how the financial services company will “classify”
2. Be sure their compliance/regulations area is researching the rules and chatting with their peers at other energy companies to determine how you will be affected.
3. Have your financial area (Accounting/
What type of internal communications are necessary, to be ready when the new rules are implemented?
SD: A. Trading desks:
You will very likely have additional margin requirement compared with what you face now. If you select your financial services provider carefully, you will have some “free margin” but afterwards, you might have to post margin above what you face today. You might need to consider lower loss hedge structures, like collar structures with stops at the top. Perhaps involve your financial services provider to help discuss these strategies
You’ll have to be sure that your financial service provider is reporting thederivatives transactions you enter into if they are reportable. Those entered into as Commercial End users will not need to be reported but others will have to be.
Check liquidity implications of having higher margin – explore lines from our lenders to see if they would fund such liquidity needs.
Is it worth it to try and guess what the regulators will eventually come up with?
SD: Probably not. Keeping your ear to the ground is the best approach at this point. Congress is pushing back on many provisions, and those they can’t push back are being delayed. Early adoption is not a good idea in this front.
What rule are you especially interested in seeing resolved?
SD: Other than a complete rewrite of Titles VI and VII of the Dodd Frank rule, I would really like the CFTC to formally state the definitions of what a Commercial End User is, a Major Swap Participant and a Swaps Dealer. Depending upon how the come out on this definition, every bank may end up being a swap dealer and many of the large energy trading companies may have to register as a major swap participant.
I would also like the Federal Reserve to offer a more concrete set of standards for when margining must be done for end users. At this point, financial institutions are expected to set an upper bound on derivatives exposure to any customer, but the Fed is silent on how big that upper bound should be.
What potential regulation do you think could have the biggest effect on the derivatives market?
SD: One of two – the Volker rule prohibits trading of commodities by any financial institution. That may affect the liquidity of the commodity markets. The swaps push out and reporting rule could impose onerous reporting requirements and as mentioned above, some margin requirements occur which are not in place now.
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Marcus evans conferences annually produce over 2,000 high quality events designed to provide key strategic business information, best practice and networking opportunities for senior industry decision-makers.