On April 10, the Commodity Futures Trading Commission (CFTC) Energy and Environmental Markets Advisory Committee (EEMAC) held a public meeting. The meeting covered the potential impacts of the Basel III proposals on the derivatives markets from multiple different industry participant views, as well as the state of crude oil markets and the future of power markets.
Below is a summary of the meeting prepared by Delta Strategy Group.
PANEL 1: UPDATES FROM THE PHYSICAL ENERGY INFRASTRUCTURE SUBCOMMITTEE AND THE ROLE OF METALS MARKETS IN TRANSITIONAL ENERGY SUBCOMMITTEE
- Tim Fitzgerald, Chair of the EEMAC Physical Energy Infrastructure
- The Subcommittee is working on two additional chapters on electricity and finance for our report. The members have agreed that there is not enough time or resources to address additional topics despite potential interest in adjacent subjects. The draft is expected to be completed by late May, followed by further comments and approval by the subcommittee.
- Ian Lange, Chair of the EEMAC Role of Metals Markets in Transitional
- Given how the markets have evolved with the increased price of copper, the report that the Subcommittee drafted has changed within the last six months. The Subcommittee plans to lay out the parameters of mineral markets that are most influential and discuss how to ensure a domestic supply of minerals that are part of the new energy technologies. The Subcommittee expects to complete the report by June.
PANEL 2: THE IMPACTS OF BASEL III
- Alexa Philo, Americans for Financial Reform
- The Basel III Endgame proposal introduces standardized approaches to enhance risk sensitivity that recognize higher derivative exposures and counterparty credit risk. The proposal will address chronic undercapitalization in large banks, reducing the risk and severity of future financial crises and protecting households and businesses from financial turmoil. Currently, the largest banks benefit from risky investments while the public bears the downside risk, leading to job losses, foreclosures, and tax bailouts. By requiring larger banks to hold more capital, the proposal will ensure they carry a greater share of the responsibility for risky investments and reduce the negative impacts of crises.
Discussion:
John Murphy, Mizuho: There are varying capital costs across different product sets, particularly with commodity products having the highest costs. The potential increase in capital costs for Futures Commission Merchants (FCMs) may lead end users to refrain from hedging parts of their physical portfolios due to the high expenses involved. This could pose risks to the marketplace in terms of both risk exposure and liquidity. It is important to consider the implications of this scenario on market dynamics.
John Melby, Xpansiv: Transparency and hedging capabilities are important tools for derivatives trading, and it is concerning that Basel III may disincentive hedging.
Rob Creamer, FIA: The way that capital requirements are calculated for fixed-income products compared to energy products is highly disadvantageous. This makes it unappealing for liquidity providers, market makers, and businesses to engage in principal trading in commodity markets.
Derrek Samaan, CME: CME is concerned that Basel III will disincentive clearing and increase market risk. It is critical to consider the financial ecosystem as a whole when considering the Basel III proposal.
PANEL 3: THE STATE OF CRUDE OIL AND DATED BRENT
- Richard Swann, S&P Global Commodities
- West Texas Intermediate (WTI) Midland crude oil from the Permian Basin has been incorporated into the basket of crudes underpinning Platts Dated Brent, the world’s leading crude benchmark. WTI Midland has played a defining part in this benchmark since its introduction in a positive way.
PANEL 4: THE FUTURE OF THE POWER MARKETS
- Matt Lind, 1898 & Co.
- The U.S. needs a more robust infrastructure to meet future demands on the power markets and the path and cost of attaining net zero carbon. The momentum and discussion around net-zero carbon will not wane, so new technology that cost-effectively facilitates wind, solar, and nuclear energy must emerge. Federal policy could help with multi-state approval issues and drive investment in new technologies.