Regulatory Impact of. on the Energy Industry

Transcription

1 Regulatory Impact of Dodd-Frank Act 2010 on the Energy Industry WSPP Committee Meeting New Orleans, Louisiana October 19, 2010 Anita Herrera Chief Compliance Officer 1

2 What is Nodal Exchange? Cash settled electric power futures exchange; exempt commercial market for eligible commercial entities Launched April 8th, 2009; currently over 50 signed Participants Providing ability to trade ~1,800 hubs, zones, and nodes across five Regional Transmission Organizations/Independent ations/independent System Operators (RTOs/ISOs): ISO NE, NYISO, PJM, MISO, CAISO and ERCOT Two platforms: Dil Daily auction Over the counter (OTC) negotiated transactions (e.g., broker) submission for clearing Central counterparty t cleared market ktfor all transactions ti through h LCH.Clearnet Cl Only cleared market for over 1,750 locations Value at Risk (VaR) based margining methodology providing substantial efficiencies i i for portfolios relative to SPAN margining i 2

3 Nodal Exchange Product Set Nodal Exchange offers ~1,800 contract locations covering all of PJM, MISO, NYISO, and ISO NE All hubs, load zones and generation nodes are represented Locations historically showing more than a % pricing correlation are grouped into single contracts Nodal Exchange offers CAISO contracts on 35 locations including hubs, zones, key pricing points, key scheduling points and high volume generation nodes as well as the four ERCOT (Texas) zones All Nodal Exchange contracts are defined by location(s) and class (Peak or Off Peak) If multiple locations are listed in a contract definition, simple average of pricing at locations is used to settle the contract Contracts settle against Day Ahead or Real Time Power Full Locational Marginal Price (LMP) for better hedging (includes energy, congestion & loss) All contracts trade in units of 1MW x number of hours in the month for peak or off peak All contracts have a monthly term Current month contracts trade against their full settlement value during the settlement month Expiries go out a rolling 4 years for over 90 locations and a rolling year for all others Natural Gas contract for Henry Hub will be added in Q

4 Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted July 21, 2010 Title VII is also known as the Wall Street Transparency and Accountability Act of 2010 defines over the counter derivatives as swaps under federal oversight by financial regulators including the CFTC and SEC Creates new CFTC registered entities: ii Swap Execution Facility, Swap Dealer, Major Swap Participant, Swap Data Repository Rules to be effective July 15, 2011 or 60 days after rulemaking whichever is later (some provisions for selective extension) Draft rules expected from CFTC by end of year CFTC and FERC must negotiate Memorandum of Understanding to establish procedures for applying respective authorities and resolving duplicative or conflicting jurisdiction due by mid January 2011 (180 days after July 21, 2010) 4

5 Overview of Dodd-Frank Act (DFA) Mandatory Exchange Trading and/or Clearing Specific c swaps apscontracts (to be determined ed by the ecftc) C) must be executed ecuted on a registered exchange, either designated contract market (DCM) or swaps execution facility (SEF), and cleared through registered derivatives clearing organization (DCO) Mandatory clearing does not apply to all contracts that can be cleared, rather only to specific contracts designated by the CFTC End user exemption to be defined in rules (e.g., non financial, hedger) Registration of Market Participants Swap Dealers (SD) and Major Swap Participants (MSP) As either SD or MSP, not eligible for end user exemption Specific margin and collateral requirements Applies to cleared and uncleared contracts Public Reporting of Swaps on real time basis Mandatory public disclosure of pricing data on both cleared and uncleared swaps Uncleared swaps reported through Swaps Data Repository (SDR) Type of pricing data and definition of real time to be addressed in rules 5

6 Swaps Contract t vs. Futures Contract t vs. Forward Contract t Type of Contract Pre Dodd Frank Post Dodd Frank Swap Customized financially 1. Privatelynegotiated and traded 1. Privatelynegotiated OTC settled contract w/pricing based on occurrence of an event Swap Standardized financially settled contract w/pricing based on occurrence of an event Futures Contract Standardized contract for purchase/sale of commodity for future delivery used to hedge/shift price risk ikthat t may settle financially Forward Contract Purchase/sale agreement for physical delivery of commodity in the future OTC; uncleared 2. No regulatory oversight 3. No reporting of trading data 1. Privately negotiated and traded OTC; uncleared & cleared 2. No regulatory oversight 3. No reporting of trading data 1. Standardized 2. Traded on DCM (or ECM) 3. Cleared by clearinghouse (DCO) 4. Publicly reported trading data by DCMs 5. Regulated by the CFTC 1. Typically customized agreements for purchase/sale 2. Not regulated by CFTC 2. Report to Swaps Data Repository 3. Not cleared by DCO 4. Public reporting of trading data 5. Regulated by CFTC and subject to CFTC rules TBD 1. Negotiation based on standard terms 2. Executed on SEF or DCM 3. May be cleared by Clearinghouse (DCO) 4. Publicly reported trading data 5. Regulated by CFTC and subject to CFTC rules TBD Same as Pre Dodd Frank because futures contracts are excluded from Dodd Frank Same as Pre Dodd Frank because forward contracts are not CFTC regulated nor subject to Dodd Frank 6

7 New regulatory categories subject to CFTC Rulemaking Swap Dealers Major Swap Participants Exempted End Users 1. Known as dealer; makes a market in swaps for own account 2. Enters into swaps with counterparties in the ordinary course of business 3. May or may not be financial sector entity 1. CFTC registration required 2. Recordkeeping requirements 3. Reports to CFTC of transaction and pricing data on cleared and uncleared swaps 4. Initial and variation margin on uncleared swaps 1. Business conduct rules (fraud, manipulation, position limits) 2. Record retention, audit trails, recorded communications, back office requirements 1. Maintains substantial position in swaps other than to hedge/mitigate risk 2. Create substantial counterparty exposure or highly leveraged 3. May/may not be financial sector entity Same as Swap Dealers Same as Swap Dealers 1. Hedging own commercial risk 2. Not financial sector entity 1. No CFTC registration 2. Reports to CFTC its means of meeting financial obligations on un cleared swaps 3. Initial and variation margin on un cleared swaps 1. Option to clear 2. Public companies required to obtain approval by board of directors or governing body 7

8 Obligations towards Special Entities (SE) Definition of SE - Federal/state agency, state, city, county, municipality or other political subdivision of state, employee benefit plan, government plan, endowment (per IRC 501(c)(3)) Swap Dealers and Major Swap Participants Dealing with SE s Prohibited from engaging in fraud, deception, or manipulation Exercise reasonable efforts to obtain information to make reasonable determination that swap recommendation is in best interest of SE: Financial status Tax status Investment objectives That enters into or offers to enter into a swap with SE, must have reasonable basis to believe that SE has independent representative: Sufficient knowledge to evaluate transaction & risks Not subject to statutory disqualification Independent of SD/MSP Has duty to act in the best interest of the SE that it represents Makes appropriate disclosures Will provide written representations to SE regarding the fair pricing & appropriateness of transaction 8

9 Obligations towards Special Entities (SE) Continued Swap Dealers as Advisors Duty to act in best interest of SE that it represents Fiduciary duty to government agencies Before any transaction, must provide disclosure in writing regarding the capacity in which the SD is acting Exceptions to SD/MSP Obligations Transactions initiated by SE on an exchange or swap execution facility SD/MSPdoes not know the identity of counterparty to the transaction NOTE: These Dodd-Frank provisions recognize that there will be OTC off exchange transactions 9

10 Where to trade, clear, report etc. Designated Contract Swap Execution Facility Derivatives Clearing Swap Data Market Organization Repository CFTC Registered trading facility for futures contracts approved or self certified through CFTC Offered to the public through futures commission merchants responsible to know customer Established regulatory regime, including real time trading data disclosure CFTC Registered trading facility for multiple to multiple party, algorithmic trading of standardized swaps Execution facility for multiple to multiple party, not algorithmic trading of standardized swaps Trade processing facility undefined Access limited to eligible contract participants Trade data reporting real time to be defined CFTC registered clearinghouse Substitutes credit of DCO with credit of trading counterparties Settles or nets contract obligations of counterparties Required to provide open access on non discriminatory basis to SEFs CFTC Registered recipient of trading information on un cleared swaps 10

11 For more information please contact: t Anita Herrera Chief Compliance Officer Nodal Exchange, LLC 8065 Leesburg Pike 7 th Floor Vienna, VA Herrera@NodalExchange.com 11