Energy Position Limits May Cause More Price Volatility, IEA Says
The implementation of stricter regulations on global swaps markets, such as position limits and higher margin requirements, may cause energy prices to become more volatile, the International Energy Agency said.
“The new rules are intended to bring transparency to the swaps markets and lower their risks,” the Paris-based energy adviser said in its monthly oil market report today. “Regulatory uncertainties and inconsistencies within and across jurisdictions might in fact lead to less transparent and more risky global financial markets.”
The U.S. Commodity Futures Trading Commission and the Securities and Exchange Commission rolled out regulations governing over-the-counter swaps last year to comply with the Dodd-Frank Act, which aimed to bring transparency to the markets after soured mortgage and credit bets contributed to the financial crisis in 2008.
The introduction of position limits in futures markets in order to limit speculation may cut trading activity and cause a wider spread between bid and offer prices, the IEA said.
Increased margin and capital requirements could expand the market share for large speculators in commodities without affecting prices, the agency said.
Energy markets are undergoing “futurisation” as exchanges such as the Intercontinental Exchange Inc. (ICE) and CME Group Inc. (CME) move to convert over-the-counter energy swaps into futures, the IEA said in its report. This may limit the effectiveness of regulators’ efforts to standardize swap markets.
Varying rules may also spur market participants to migrate their trading activities to regions with less strict regulation and shift financial risks to more opaque areas, the IEA said.
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