The one lesson energy market participants are learning is that the Dodd Frank Act applies to everybody in the US-listed company space. Even if a company is exempt from mandatory clearing requirements, they cannot escape reporting and position limits requirements. That means companies in the energy sector are going to need to consider how they operate, behave, transact and even how data moves around the company internally and externally. In other words, implementing Dodd Frank is going to be a major compliance undertaking.
IRJ drops a line to Houston, Texas, where the Energy Risk conference took place on May 15 to 16, to talk to Sid Jacobson, on the status of regulatory reforms.
IRJ: What is your role at SunGard?
SID JACOBSON: I am responsible for our risk management practice and leading [SunGard’s] Dodd Frank efforts globally. Our core business is on delivering solutions and making sure that everybody meets their compliance dates based on their interpretation. I am on the speaker circuit quite a bit and I don’t want to be misconstrued as a proponent of Dodd Frank, although I do think there will be some benefits, but what I am a proponent of is the need to comply.
IRJ: What is the status of hedging definitions such as which companies can be classified as end users and which are swap dealers?
JACOBSON: The CFTC [Commodity Futures Trading Commission] has finalised [those] definition[s]…and I think that has made many physical energy market participants a lot more comfortable. [The CFTC] have still designed the definition to be subjective…I think where the uncertainty still lies is that companies now need to make a decision on who they are. They need to look at their business and decide if they want to be a swap dealer or what activities they need to reign in so that they don’t inadvertently leave themselves exposed to the cost and the governance of [regulation]. But as a non-swap dealer, it certainly reduces the burden of a lot of the complexity of the rules, but it doesn’t alleviate at all the need to implement many of the rules - position limit monitoring, real time reporting, etc.
In order to qualify for a clearing exemption, you have to prove on a transaction by transaction basis that [the transaction] is a hedge, as defined by the CFTC, and there are four or five different definitions of a hedge - it is across the various rules and they are not all consistent, but the good thing about those definitions is that they are broader than the accounting definitions of a hedge. So it gives you a little more discretion, you don’t have to do correlation tests and back tests, you just have to prove that it is a commercial hedge.
But in the process of proving it is a hedge on a transaction by transaction basis, a lot of new data and a lot of new steps [are created] for organisations. So, swap dealers who know they are swap dealers have a fairly robust infrastructure that will require additional investment for Dodd Frank compliance, a lot of the real pure end users don’t [have robust infrastructures] and it still will have a significant impact on how they transact, how they sort out information and how they report.
IRJ: Where do oil and gas companies fit in for becoming compliant?
JACOBSON: I would say that financial [institutions] are way ahead, the oil majors are first movers and…it is really the merchant energy and natural gas companies that are still on the side lines.
I would say right now, about 40 per cent of energy market participants have begun Dodd Frank implementation projects, it is finally out of their regulatory group and onto the trade floor and into the IT department and that is probably growing by about five per cent every two weeks now that the definition of swap dealer is out.
I think everybody is still waiting for a one-time, or once a year, or once a month form that they would fill out that would prove hedge exemption rather than [report] on a transaction by transaction basis.
IRJ: One of the concerns I hear in the industry refers to the huge volumes of data that will be generated from compliance, but haven’t energy companies been through this before with regulations like Sarbanes-Oxley (Sox)?
JACOBSON: The big difference between Dodd Frank and Sox was that Sox was a framework to behave under, there were some prescriptive rules - more involvement and signatures and types of audits - but a lot of the implementation [of Sox] became best practice based on how others were choosing to interpret the rules.
Dodd Frank is very prescriptive, it tells you specifically what, when, how, what format, who you transfer the data to and how frequently. In a way, it provides a clearer road map, you don’t have to guess what your report template looks like and you don’t have to guess what is included in that report or whether everybody is writing something different.
But the thing that concerns me most about the late-starters in implementation is that it is so data intensive and reporting intensive and a lot of the information needs to be transferred. [This activity] is not core to the energy business like it is in the broker dealer market. It is going to be a big undertaking regardless of the size of your company, it is going to be an investment and it is going to take a lot longer than the 60 or 90 days that they give you to comply with each rule.