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1. SPECIAL REPORT ASIA PETROLEUM REVIEW ASIA PETROLEUM REVIEW SPECIAL REPORT
OTC Swaps Face Legal Void
said David Wech at JBC Energy. million barrels that is made available, gasoil futures curve.
European run rates are already and what ultimately will be taken European ICE gasoil futures are
hovering near post-recession lows at up by the market will depend on the currently in a $4 contango -- a structure
As CFTC Misses Deadline
79 percent of capacity and at least 10 marketing mechanisms chosen to where the front month contract is
percentage points below U.S. levels -- make that oil available: so essentially below those further in the future -- and
largely because of the hefty premium the prices at which the national some traders expect the stock release
of European benchmark Brent crude to agencies sell that oil”, BNP Paribas’ could steepen this structure and make
U.S. futures. head of commodity markets strategy storage more lucrative.
While it will be mandatory under the Harry Tchilinguirian said. But as with the multi-billion dollar
IEA measures for holders of commercial storage trade that emerged due to
oil products stocks to offer supplies for oversupplies after the 2008 recession,
“The IEA data has nuked
sale, there is no guarantee that buyers the refined oil may simply be transferred
will come forward. Wech predicted only the market. It makes one from one tank to another.
around 350,000 bpd of the planned wonder how they’ll replace “People will just play the contango
500,000 bpd would be released this the stocks, seeing as they’ll with the barrels. The fact is there’s no
summer . likely put half the European demand,” said a trader with a European
In the case of Britain, for example, refiner.
refining community out
obligations backed by the IEA for But traders said owners of storage
stockholders to keep enough supplies of business in the process,” may be punished by a steep contango
for a minimum period will simply be said a distillates trader since they will be forced to buy back
lowered, which may not result in an with a trading house their own oil at a higher price later to
immediate sale of surplus volumes, replenish stocks.
traders said. Another possible scenario is the stock
Traders said the marketing and STORAGE PLAY release boosts exports, but traders
pricing mechanisms for the sale, which Traders said that some savvy traders said arbitrage economics for diesel for
are currently unclear, will be key in could benefit from the extra supply example are not currently profitable.
determining the ultimate take-up. injection of distillates like diesel by
“You have a notional amount of 60 exploiting a deeper contango in the ICE (Editing by Anthony Barker)
Bernanke, Schapiro, Gensler and Walsh testify before the Senate Banking Committee hearing in Washington. REUTERS/Jonathan Ernst
By Christopher Doering
B illions of dollars in derivatives will
be headed into legal limbo if U.S.
regulators don't create a short-term
term bridging measure or simply opt
not to enforce the rule; but without
greater certainty, compliance officers
oversight of the $600-trillion global
over-the-counter derivatives market.
Facing a gap between the protection
fix to the market chaos that could be face some sleepless nights. regime under the current commodities
unleashed by missing a July financial "I'm sitting here right now trying to act and the new rules from Dodd-
reform deadline. figure out what I have to do to make Frank, market players are scratching
The Commodity Futures Trading sure that my firm is in compliance on their heads and fearing a worst-
Commission, in the midst of writing July 16. And I am struggling, big time. case scenario involving invalidated
dozens of new rules, has said it will miss This is a real threat," said Gary DeWaal, contracts, dried-up liquidity, and an
the July 16 deadline for implementing group general counsel for brokerage exodus to offshore trading.
rules that give it oversight of the Newedge.
$600-trillion global over-the-counter "We need to deal with this threat as LARGELY UNREGULATED
derivatives market an industry immediately. We cannot The OTC derivatives market, which
As a result, many of those contracts wait ... because we need to plan." includes commodity, interest-rate and
may lose the legal protection afforded OTC trades soared in popularity after foreign exchange swaps, started in
them by a clause in the Commodity swaps were given legal protection, the 1980s. In contrast to the futures
Futures Modernization Act of 2000, allowing commercial parties looking to marketplace, it was largely unregulated
which created a framework that offset their risk on interest rate shifts before last year's Dodd-Frank law.
stated they were not illegal off- or commodity price swings to enter It has been an opaque marketplace
exchange futures. these deals without fear they would be dominated by a few dealers such as
The impact of that legal void may be invalidated or considering gambling. Wall Street giants JPMorgan Chase
limited if market participants believe But the CFTC has said it will miss and Goldman Sachs. Some have said
A BP logo is seen on a petrol station in London. REUTERS/Stefan Wermuth regulators will either set up a short- the deadline for most rules that give it OTC derivatives worsened the 2008
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