EMIR

By January 2013, new European Market Infrastructure Regulation (EMIR) will make it obligatory to clear standardised OTC derivatives contracts through central clearing counterparties (CCP) and to report transactions to trade repositories. Furthermore, EMIR aims to reduce credit risk by introducing minimal capital and variation margin requirements for firms trading OTC derivatives that are not cleared by a CCP.

At Global Energy Advisory we are strategic consultants in energy trading and finance. This means that we think as financiers as well as energy traders. So here is an idea of how to comply with EMIR and enhance your return.

Credit Risk, Energy Trading & Lending

If we enter a trade together we are both accepting each others credit risk. When a bank lends it makes a return based on the term of the loan and the credit risk your firm poses. By not properly pricing for credit risk, stronger credits are paying to do business with the lower credits.

Center is a way of accessing third party margin capital and pricing for credit risk. Example: If two counterparts are trading together where the position is subject to a Mark to Market (MTM) calculation, one party will be in-the-money (ITM)/profit, and the other out-of-the-money (OTM). The counterparty with the OTM position could pose a credit risk to the other trading party. By using the Center product, the ITM trader would calculate the amount of collateral required from the OTM trader to restore credit risk to acceptable levels. They would then ask (through back office processes) for the OTM trader to issue a Center "Payment Instruction" through the Center solution in favour of the ITM trader. Once this Payment Instruction request is issued and approved by the Center settlement platform, it becomes available for third-party investors (banks) to fund and the discounted cash is passed to the ITM counterparty within two business days.

If The Trade Is Profitable, Then Further Enhance the Return

Therefore rather than not receiving any form of credit risk mitigation, the ITM trader could use the Center platform to mitigate credit risk (by dissipating it into the wider financial markets). Then the ITM trader could invest along side the banks to make an enhanced return. The banks wouldn't lend for free, so why take credit risk when you can take a return? Meanwhile the OTM trader pays the true cost of his credit risk because the investing banks have put a price on this.

Do call or email me on 44 207 692 0888 or aily@globalenergyadvisory.com if you would like to know more.

With kindest regards,

Aily