Viewing Collateral Security Through The Lens Of Recent Enterprise Mishaps

Online, October 15, 2012 (Newswire.com) - Deregulation combined with rapid growth has created a volatile market full of new opportunities for energy traders across the globe. This volatile market brings with it challenges that are distinct from other financial and asset markets, particularly in the form of trading highly volatile energy commodities, including power and gas. Moving to the center of corporate strategy, active risk management is now recognized to be of primary importance when it comes to supporting new trading opportunities.

Going beyond a simple review of existing methods, the marcus evans 5th Annual Risk Management in Energy Trading Conference outlines innovative ways to build upon risk fundamentals to achieve success in the current market climate. This conference will explore emerging trends in risk management, including the identification and application of risk appetite as a cornerstone of risk management strategies.

Nick Galletti, Managing Director - Risk Management at ConEd, and a speaker at the marcus evans 5th Annual Risk Management in Energy Trading Conference, answered a series of questions provided by marcus evans. The responses to these questions strictly reflect the views and beliefs of Nick Galletti and not necessarily those of ConEd.

marcus evans: What are the chief differences between swap collateral and future collateral treatment?

Nick Galletti: The main difference relates to customer collateral protections on deposit at Futures Commission Merchants (FCMs) and Derivatives Clearing Organizations (DCOs). For cleared swaps, the approach is called "legally segregated operationally commingled," which has the effect of reducing fellow customer risk by limiting the DCO's ability to access non-defaulting customer collateral. The clearing organization will not be allowed to use non-defaulting customer funds in the scenario where an FCM default is caused by a customer default ("double-default scenario"). This contrasts with the futures model, which treats all customer funds in an omnibus account, where the clearing organization has access to all customer funds in the double-default scenario. Other differences involve more detailed record keeping responsibilities and requirements on the part of the FCM and DCO. DCOs will now have more detailed records of each customer's swaps and collateral, which should help increase portability of customer accounts in the event of an FCM default.

marcus evans: In what ways did the MF Global/Peregrine scandal affect companies in the energy trading industry?

NG: I think it is the realization that customer funds on deposit involve some level of risk of loss - whether it is default risk, operational risk, loss on investments or outright fraud. For energy companies engaged in futures and cleared swaps trading, it is crucial to monitor the developing financial regulations and how they are evolving in order to understand the new law's impact on risks. Recently, the CFTC adopted rules designed to protect customer funds held at FCMs. These rule changes include the disallowance of the Alternative Method in calculating customer fund requirements for secured accounts. FCMs also have additional daily reporting requirements on the status of customer account funding. Withdrawals from segregated or secured customer accounts greater than 25% of any excess balance must be pre-approved in writing by senior management of the FCM. These additional controls should provide enhanced protection of customer funds at FCMs.

marcus evans: What aspects of the Dodd-Frank regulations do you believe will present the biggest challenges? What areas will companies need to focus on to succeed in the current regulatory climate?

NG: Dodd Frank's requirement to clear swaps raises a concern that credit risk will be concentrated into DCOs. As the swaps market is significantly larger than the futures market, it is important that DCOs have strong internal controls in place. The CFTC has issued final rules for core principles of DCOs relating to financial resources, risk management, margin methodology, and default procedures to ensure the integrity of clearinghouses. Market participants must familiarize themselves with these core principles.

Nick Galletti will be leading the session, "Viewing Collateral Security in the Global Trading Community through the Lens of Recent Enterprise Mishaps" on Friday, November 9, 2012 at the marcus evans 5th Annual Risk Management in Energy Trading Conference.

For more information regarding this conference and to register, please contact Robin Yegelwel, Marketing & PR Coordinator, at(312) 540-3000 ext. 6483 or [email protected]

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