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To help evaluate the attitudes and preparedness of companies affected by Dodd- Frank, Accenture recently concluded a quantitative global online survey of 132 company executives in Europe and North America regarding the Dodd-Frank regulation. Respondents included over 100 financial services executives and over 30 resources industry executives.
Nearly three years after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), market participants have made initial assessments as to the practical impacts, costs and constraints the new regulations impose on Over-the-Counter (OTC) derivative activity. While the Commodity Futures Trading Commission (CFTC) recently issued additional “no-action” guidance providing some relief to compliance dates, it is critical that companies finalize implementation strategically to identify opportunities which strengthen their risk management practices.
More than half (57 percent) of energy respondents strongly agree that Dodd- Frank presents competitive challenges for them in the global market, as opposed to just 32 percent of capital markets respondents.
Ninety percent of non-financial companies surveyed agreed that the Dodd-Frank Act would help to reduce their overall risks.
In the energy industry, 57 percent of respondents named OTC derivatives regulation as very challenging.
An even larger percentage of energy industry respondents (64 percent) saw potential difficulties with enhanced capital standards.
Resources companies (including energy, mining, utilities and chemicals companies) generally saw Dodd-Frank as more challenging than did their counterparts in financial services.
The energy industry respondents anticipated spending the most on Dodd- Frank.
Despite the significant costs imposed by Dodd-Frank, energy industry respondents were most optimistic about how the Act would increase their company’s profitability.
Of the Industries responding to the survey, companies in the energy industry are most likely to be planning or have ongoing changes regarding cost reductions, change management programs and a focus on core competencies. Among those surveyed, 44 percent of energy companies plan to focus more on core competencies in the next two years, and 69 percent plan to implement cost reductions during that same period.
Energy and utility companies engaged in the OTC commodity market may ease the burden of compliance to the Dodd-Frank Wall Street Reform Act by considering assessing, sooner rather than later, current business objectives and organizational model against the new regulatory requirements. A key objective is to determine where new regulations impose constraints on current operating models and where new regulation may provide opportunities for better risk-adjusted strategic decisions.
Organizations which institute enhanced or leading industry risk management practices will likely have less difficulty transitioning to the new regime. Furthermore, energy and utility companies may wish to consider improving their overall data capture and management. Enhanced credit support for derivative transactions will likely require greater integration between corporate finance and the business use of derivatives, as daily margining puts greater constraints on cash management. To manage external reporting requirements going forward, companies may wish to give thought to applying a higher level of focus and rigor to the quality and maintenance of data across the full suite of enterprise risk management activities from front to back office, across business units and upward to the corporate finance and compliance functions.
For each of the areas affecting all Over The Counter commodity market participants – clearing, data and reporting, position limits and new business conduct rules – companies may consider starting the process by asking the following questions.
Have you identified all Dodd-Frank swap activity as defined by the CFTC?
Will any part of the organization register as a swap dealer or major swap participant?
If so, how well would the existing enterprise risk management governance structure comply with the additional external and internal business conduct standards for swap dealers and major swap participants?
Will your organization claim the End-User Exception from clearing? If so, which entities?
Can those entities validate hedge positions at trade execution and excluded from the aggregate portfolio by derivative product?
What portion of the OTC derivative portfolio is currently traded and cleared on exchanges?
How much uncleared OTC activity will move to clearing and be subject to margin requirements?
Have you identified what additional processes or technology will be required to meet reporting, recordkeeping requirements for uncleared swap activity?
HCan futures, options, swap and swaptions data be aggregated for position limit reporting requirement?
S. Hurley, managing director, Risk Management, and Global Resources lead. Based in Austin, Texas, Hurley has over 30 years of global, industry and consultancy experience in the energy, resources and metal sectors as a trader, managing director and NYMEX seat holder.
M. Jannasch, principal, Risk Management, based in Houston, Texas. Jannasch brings 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.
May 22, 2013
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