Dodd-Frank’s Impact on Commodity Hedging Markets

Navigant authors article for Oil + Gas Monitor

One specific result of Dodd-Frank is new rules that change how the derivatives market functions and operates, which affects how commodity hedging will be done in the future. In a recent article for Oil + Gas Monitor, Navigant’s Thomas McNulty outlines what’s changed and what energy companies can do to better quantify commodity price exposure in the post Dodd-Frank world.

According to McNulty, some of the business that banks have exited, as a direct result of Dodd-Frank, can and will be picked up by other banks, and by merchant trading firms. However, the cost and liquidity concerns are very real today. The typical oil and gas company, as an example, can expect to have fewer counterparties with which to do business. Plus, the cost to execute commodity derivative trades, in order to hedge, will be higher. If Dodd-Frank is making it more expensive for banks and traders to do the work, then where will they pass the additional costs to? They will pass them to their clients and customers in many cases. Regulation most often increases the cost to do business and rarely causes it to decrease.

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