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.

How Transparent Are Crude Oil Derivatives Markets?*

Increased volatility, higher crude oil prices and the arrival of new financial participants in the crude oil market during the last decade have raised the question of whether financial players have an impact on commodity prices and price volatility. Unfortunately, limited publicly available data in both physical and financial markets makes it very hard to provide a definitive answer. Understanding the linkages between physical and financial markets on price formation requires more complete information on both than is currently available. Traders in derivatives markets rely on signals from current and expected physical fundamentals , but these signals can be distorted by imperfect or delayed information flows Therefore, it is crucial to have more timely and reliable information from physical markets in order to address the observed volatility as well as to determine the influence of different market participants on prices.