Participants in the energy industry have more exposure to energy commodity price volatility and risk than many other commercial sectors. During the course of many decades, the industry has employed a number of contracts, financial instruments and other techniques to manage or “hedge” these risks. Among these techniques are the use of financial derivatives contracts, forward contracts and pooling of risk among multiple project participants.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010, in response to the perceived regulatory failures in the U.S. financial system resulting in the financial crisis of 2007-2008. Title VII of Dodd-Frank requires an overhaul of federal regulation of many financial instruments and contracts that energy companies employ to hedge commercial risk. Under Title VII, certain classes of persons that transact in financial derivatives contracts, or “swaps,” will be subject to an array of new regulations, including capital, margin and reporting requirements; mandatory clearing and trade execution requirements; and increased scrutiny.
