RiskTech Forum

Derivatives regulations motivate banks to make lower use of commodity contracts

Posted: 5 November 2012  |  Source: FINCAD


Banks have been reducing their use of commodities derivatives as a result of new regulations related to capital requirements and other restrictions.

After the financial crisis, lawmakers have created myriad new regulations designed to help constrain the commodity and energy derivatives activities of banks, according to Energy Risk.

"The financial crisis has changed the way banks regard energy trading and energy markets," Lawrence Haar, director of commodity trading risk management at UniCredit, stated while speaking at Energy Risk Europe on October 3, the media outlet reports. "I'm not going to tell you to hug a banker, but from the standpoint of energy companies looking for hedges, the role of banks is changing."

The impact that this will have on the various market participants that want to hedge their energy and commodity risks – including utilities and mining firms – is ambiguous, according to the news source. Some market experts have speculated that instead of being serviced by banks, these organizations will work with entities such as hedge funds that are less restrained by derivatives regulations.

One law in particular that could impact banks is the Volcker rule, which would prevent these organizations from engaging in proprietary trading, which involves transactions that do not benefit the financial institutions' customers.