Study of regulatory risk in the commodity derivative markets

Abstract

The year 2008 was a major setback for the major economies of the world due to the financial crisis that shook the entire world as well. Trading of derivatives prior to that was taking place by two ways. One was through exchanges that had certain standards to be followed laid down by various regulatory authorities. The other one was Over The Counter (OTC) which was more of unregulated. The volume of trade taking place through OTC was much more as compared to the exchange traded volume. This was solely due to the option of being able to customize the contract in OTC trading as compared to the exchange traded trading which had to be in accordance to the standards laid down by the exchanges. It is claimed by many that the financial crisis took place due to the volume of unregulated trading taking place in the OTC trade. Investors were more comfortable trading through OTC rather than exchanges. Since then there have been many regulations that have been passed in the United States (US) and European Union (EU) to regulate the so-called OTC markets. These are the Dodd Frank Act in the US, European Market Infrastructure Regulation (EMIR), Regulation on Wholesale Energy Markets Integrity and Transparency (REMIT) in EU, Basel I, Basel II, Basel III, Basel IV, Markets for Financial Instruments Regulation (MiFIR) etc. Dodd Frank Act and EMIR are said to be the toughest regulations ever written till now. This report takes a step to view the market pre-and post implementation of the regulations, their impact on the market and stakeholders perspectives. I have tried to cover most of the aspects of all the regulations in a nut shell. At the end of the report it focusses on the ETRM software that are used for Energy markets as well as other commodity markets.