Sid Jacobson, partner in the energy and utilities consulting business of SunGard Global Services, said, “Swap market regulations like those found in the Dodd-Frank Act are expected to change the way the energy industry does business, especially in terms of transaction life cycle decisions, data and processes. Implementing straight-through processing and operational efficiencies in a holistic compliance program will help firms realize benefits such as reduced operating costs that will help offset the investment required in people, process and systems.”
SunGard has identified ten ways that the Dodd-Frank Act is affecting the energy industry:
1. Swap market regulations, particularly those related to transparency and capital adequacy, are expected to require swap market participants to change everything from policies and capital management to data retention, compliance reporting and transaction processing.
2. Some energy companies are seeking to help preserve their reputation, avoid fines and reduce costs via compliance workarounds – such as planning to eliminate certain trading activities – that could change their business models and risk profile.
3. Rules will continue to evolve even after compliance dates are triggered, driving continuous reevaluation of operations and systems.
4. While the industry asks for clarity in certain swaps definitions, many firms are re-evaluating the risk exposure and portfolio impacts of these contracts and assessing the potential effects on their financial performance.
5. Firms will continue to move away from transacting in swaps in favor of futures – where the regulations and infrastructure are mature – and physical fixed price contracts, which allow for less capital-intensive forms of collateralization.
6. Cross-border jurisdictional uncertainty will continue to create confusion around implementation requirements, compliance timelines and implementation costs, making it more complicated and costly for multi-national companies to prepare for the regulatory changes.
7. Collateral costs could rise as more transactions are required to be cleared or margined and Futures Commissions Merchants (FCMs) and Designated Clearing Markets (DCMs) look for greater financial protections.
8. The readiness of Swap Data Repositories (SDRs) and ETRM vendors to meet compliance deadlines will be a concern as vendors and firms work together to define and test their data interfaces, phase in their systems modifications and align rule interpretations.
9. To help ensure compliance, swap market participants will continue to invest significant human and capital resources in gathering and centralizing transaction data, revising transaction and compliance processes, developing reporting interfaces, and re-evaluating margin and collateral adequacy.
10. Initiating compliance projects should help firms see benefits such as streamlined transaction lifecycle processes, more reliable data, and more flexible risk, performance and compliance reporting.
Howard Tai, senior analyst, Aite Group, said, “The futurization of the commodity swaps market is already underway, as evidenced by ICE’s recent announcement of moving cleared OTC energy swaps to futures. This and other similar transitions of OTC swaps to futures exchanges will likely pick up pace in the next few years. Firms should try to find partners who best understand all the requirements for making these changes to help them navigate this important transition in market structure.”