Posted on 05/17/2009 9:47:32 PM PDT by reaganaut1
Energy markets are getting swept up in the Obama administration's drive to crack down on off-exchange trading of exotic financial instruments blamed for sparking last year's crisis.
The Treasury Department, along with other regulators, wants many common over-the-counter, or OTC, derivatives to trade through a central counterparty so that a failed trade can't have a domino effect on the market. The regulators are targeting what was a $684 trillion market in June 2008, according to the Bank for International Settlements. Commodities make up just 2% of that total, but participants in oil, gas and power markets say it could become more difficult to manage price risk in corners of the energy sector where the best-suited derivatives can't go through a central counterparty, which transfers the risk that a trade will fail to a clearinghouse.
View Full Image The Treasury Department Getty Images
The Treasury Department, shown here in Washington, wants some derivatives to trade through a counterparty. The Treasury Department The Treasury Department
"In what regulators are attempting to accomplish here, energy is the dolphin getting caught in a tuna net," said Michael Cosgrove, managing director in charge of North American commodities at brokerage GFI Group Inc.
The new regulations would require that if a derivative is handled through a central counterparty, then all similar contracts also must be. Less certain is the fate of markets where tailor-made derivatives are the norm, such as power and physical oil. Utilities, for example, often use derivatives that bear little resemblance to any standardized contracts to manage electricity prices in specific places and times.
Regulators could unintentionally make it more difficult for utilities to trade the physical power needed to deliver electricity to customers, said Mike Hughes, a spokesman for Progress Energy Inc., a Raleigh, N.C., utility.
(Excerpt) Read more at online.wsj.com ...
If they can't use 'cap and trade', they will find another way to turn out the lights.
Some would sooner have no energy than expensive energy...
Then let them. Here, heat is life for 6 months out of the year.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.