The Changing Structure of Energy Trading Markets[†]

Energy trading markets have been undergoing radical transformation lately. These transformations are set to accelerate in 2013 because of much anticipated implementation of new rules that will govern global swaps markets.  These  include  measures  such  as  position  limits,  mandatory  clearing  and  margin  requirements,  capital  requirements,  pre-  and  post- trade  transparency  through  position  reporting  requirements  to  trade  repositories,  as  well  as trading  standardised  swaps  on  designated  contract  organisations or swap execution facilities where multiple traders can place bids and offers, and real time  reporting  of  cleared  and  uncleared  swaps  to  the  centralised  swap  data  repositories.  These  changing  dynamics  present  new  challenges  not  only  for  financial  speculators,  who  buy  or  sell  any  asset  in  the  anticipation of a price change, but also for traditional energy companies that use previously unregulated  financial derivative instruments to hedge or mitigate commercial risk.

Margin Requirements in Futures Markets*

Despite scant evidence of a negative impact of speculation in the oil market, in seeking to prohibit excessive speculation and its possible effect on price volatility in futures markets, the US CFTC approved final rules on federal speculative positions limits on commodity futures, options and swaps positions of speculators for 28 commodities in October 2011. As we reported in previous OMRs, position limit rules are being challenged by the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) in court. They are challenging the final rule based on whether the Commission overreached its mandate by pre‐emptively setting a position limit on derivatives contracts, amid almost non‐existent cost‐benefit analysis in the final rulemaking, as well as insufficient review of some of the comment letters, which they argue that the Commission was bound to take into account. The court still has to deliver its decision on the speculative position limit rule.

High Frequency Traders: Flash Crashers or Liquidity Providers?*

On 6 May 2010, major American stock indices and stock index futures nosedived by more than five percent before sharply recovering in less than 30 minutes. Since that infamous flash crash, high frequency traders (HFTs) have drawn the attention of regulators, exchanges and market participants, despite the fact that the crash was not triggered directly by HFTs, according to an official joint report released by the US CFTC and SEC. Nonetheless, fragmentation of trading venues and the establishment of the US Regulation National Market System and the European Union’s Markets in Financial Instruments Directive (MiFID) in 2007 requiring brokerages to find the best execution for customers, have led to the explosive growth of HFTs.

Is WTI Weakness Purely Physical?*

Prices for crude oil benchmarks WTI and Brent have historically been related. In general WTI light sweet crude oil sold at a 5% premium to Brent crude oil between 1994 and 2010. However, this relationship between WTI and Brent crude oil totally collapsed in 2011. Brent crude oil sold at an average premium of $13/bbl in 1H11, or 13%, reaching $23/bbl in mid-June.