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The new Dodd-Frank Wall Street Reform Act will affect companies engaged in commodities hedging or trading—and high-performance businesses are already taking note of the impacts. Dodd-Frank introduces far-reaching rules—known as “derivative reform”—for all companies trading in the over-the-counter commodity market. Affected companies should act now to assess the impacts, and determine where the new regulations impose constraints on current operating models and where they provide opportunities for better risk-adjusted strategic decisions.
While the Dodd Frank centers on the financial services and capital markets industries, its scope includes any bank or non-bank that poses a threat to financial stability, including energy companies and utilities that participate in the OTC market. For such companies there are four major areas to evaluate for business impact: clearing, data and reporting, position limits and new business conduct rules. Following are a few of the most important proposed rules of reform in the legislation:
Swaps clearing. All clearable swaps must be cleared through a designated clearing organization or swaps exchange facility, unless exempted for bona fide hedging purposes.
Data and reporting. The law establishes a new registered entity, a swap data repository (SDR) to collect and maintain data on swap transactions and provides for the prescription by the CFTC of standards for swap data recordkeeping and reporting. Parties to a swap must report swap data to a real-time disseminator.
Position limits. In response to “too big to fail,” derivative reform will expand current positions limits and institute new to-be-determined ones, with the exception of OTC activity that is for bonafide hedging purposes.
Business conduct rules. Swap dealers and major swap participants will be subject to conduct standards in dealing with counterparties and in their internal business practices.
As companies respond to regulatory reform, Accenture can help them transform risk management into a value-enhancing capability, positioning companies for higher economic returns, improved shareholder value and increased stakeholder confidence. In effect, regulatory compliance can be integrated into the strategy to achieve high performance. Accenture believes a proactive, integrated and holistic approach should be considered in responding to the reforms and recommends that organizations:
Assess the potential impact of Dodd-Frank on their objectives and organization, especially with regard to swaps clearing, data and reporting, position limits and business conduct rules.
Assess their governance, people, processes and technology to identify any gaps between their capabilities and the requirements and opportunities presented by Dodd-Frank.
Create a road map to capture opportunities and close any gaps to compliance.
Energy and utility companies should develop a master plan and make one set of business, technology and data changes across the enterprise. The master plan will also help guide organizations in determining where the new regulations impose constraints on current operating models and where they provide opportunities for better risk-adjusted strategic decisions.
Shelley Hurley is Accenture's executive director-Risk Management, and Global Resources lead. Hurley has more than 30 years of global, industry and consultancy experience in the energy, resources and metal sectors—as a trader, managing director and NYMEX seat holder. Her previous roles as chief risk officer and founder of the Committee of Chief Risk Officers in the resources sector, and her extensive experience in risk management, credit risk management, operational risk management, trading and performance management helps executives from multinationals across the energy and resource sectors become high-performance businesses.Margarita Jannasch is principal-Risk Management for Accenture. She has 20 years of combined industry experience in energy upstream planning and economics, wholesale energy merchant mid-office risk controls, international energy project risk management and integrated electric utility enterprise risk management, governance and strategy. Jannasch has served in risk management executive leadership roles, where she implemented and managed formal risk committees, risk processes and standards. As Accenture’s Resources Risk Management expert in regulatory reform and compliance, she helps companies become high-performance businesses.
April 20, 2011
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