Home > Property & Casualty > Dodd-Frank Act rolls out new energy compliance standards

Dodd-Frank Act rolls out new energy compliance standards

US-GreatSealThe Dodd-Frank Act will bring greater and more stringent regulation to the energy industry through tighter requirements for swaps and physical options in the energy trading markets. Until recently, energy market participants could trade over-the-counter market swaps without strict oversight from the Commodity Futures Trading Commission (CFTC). Dodd-Frank intends to reduce systemic risk, add transparency to the swaps industry and prevent the abuse of smaller market participants by large trading firms.

With the enactment of the Dodd-Frank Act, the energy trading world will be split into Swap Dealers and End Users. Swap Dealers enter into bilateral swaps for purposes other than hedging. End Users use swaps to hedge their portfolios. Both Swap Dealers and End Users will now have to register with the National Futures Association (NFA), which will act as a branch of the CFTC to implement the new rules and regulations. Firms defined as Swap Dealers will be subject to banking-style regulations for the first time, including minimum capital requirements, stricter data retention and reporting, mandated compliance, and contract revisions to accommodate new representations and warranties.

Many energy market participants have pushed back on the regulations, citing a significant disconnect between how the CFTC feels the regulations can be implemented and the reality of actually implementing them. A 2011 report by the National Economic Research Associates (NERA) stated that the regulations as proposed could cost the average firm $62 million dollars annually to comply. The CFTC responded by suspending some of the reporting regulations and delaying compliance obligations to allow the industry enough time to prepare. Several key issues remain unresolved, however, including rulings on commodity options, position limits and regulations of foreign jurisdictions trading with US companies.

Click here for more information on the latest Dodd-Frank requirements.

About the Author

 Molly Lovelette is an Assistant Vice President at WGA in the Property and Casualty Group, with a specialized focus on energy and construction insurance programs. She serves the needs of numerous energy clients, including independent power producers, owner-operators and manufacturers in the wind, solar, landfill gas, waste-to-energy and fossil fuel industries.

617.646.0245 | Mlovelette@wgains.com | Connect on LinkedIn

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