Financial regulations are the raw vegetables of today’s energy trading business. Few would argue with their general virtue, but almost no one thinks they are very appealing.
Arousing interest in subjects like the definition of a swap as defined by the Commodity Futures Trading Commission this week is a challenge, despite the broadly understood importance of the ruling.
The Dodd-Frank rule was intended to make the financial sector more secure in the wake of Lehman Brother’s failure and the massive bailout of Wall Street banks that followed. In part because the regulation was written at a time when relatively high oil prices were adding further drag to the US economy and in part because Wall Street banks have taken a progressively higher-profile role in energy markets, long-established energy trading practices came under the CFTC’s spotlight even as natural players like oil companies, airlines and utilities claimed the Dodd Frank law was never intended to impact them.
As the attached document, a fact sheet from the CFTC issued following its vote on the final rule defining swaps yesterday, makes more or less clear, the regulatory body both agrees and disagrees. Rather than issuing blanket exemptions, it lays out the principles for the kinds of contracts that would qualify for higher degrees of oversight. The industry’s lawyers and risk managers will be working their way through the language for the next few weeks, but the impacts on energy trade will be watched closely by the entire sector.
For more on the swaps definition, visit the CFTC’s hub here.