PARIS, July 13 – Proposed rules clamping down on financial markets in response to the global crisis may create big unintended dangers and affect oil trading, the International Energy Agency warned on Tuesday.
Costs for airlines, oil refiners and businesses using financial risk instruments could rise sharply, the IEA said, citing an estimate that reforms might impose extra collateral guarantees totalling 400 billion dollars.
The agency, which is the energy strategy branch of the Organisation for Economic Cooperation and Development, also warned that a crimping effect on investment funds may reduce the ability of markets to absorb risk.
And it cited a warning from top European industrial companies that EU proposals could even spark a new crisis.
The work of the IEA, as input into the OECD, forms part of the bedrock of advice on policymaking to the governments of its 31 members, which are all leading advanced economies. The OECD has advised on the drafting of post-crisis financial and regulatory reforms.
In a passage headlined: "Unintended consequences of new market regulation," the IEA said in its monthly review of energy markets that "governments are moving apace with new regulations on financial markets, including energy derivatives."
In June, a summit of G20 leading countries had made headway in discussing new regulations for so-called over-the counter (OTC) derivative markets.
Until now OTC markets have been governed by less stringent rules and reporting requirements than fully formalised markets. A derivative instrument is one that is based on trading in an underlying material asset, but reconstructs the components and risks by type, quantity, time or conditions of completion.
Bonds based on US sub-prime home loans are derivative instruments.
For example, an airline might use complex derivative instruments to "hedge" the risk of a rise in fuel prices, locking in to a price a long way into the future and maybe also minimising the risk that the price might in fact fall lower than this guaranteed price.
The IEA said that the United States had led the way in June with broad reforms of Wall Street. These included proposed legislation requiring so-called swap instruments and other OTC activities to move to regulated markets.
The US measures "will set a number of new restrictions on the oil trading community," it said.
Although there would be some exemptions for end-users, refiners, producers and transport companies that hedged their commercial risk such as exposure to changes in market prices, "companies such as refiners, airlines and other commercial players may be required to post collateral for uncleared swaps and thus face substantially higher costs."
It noted: "The International Swaps and Derivatives Association (ISDA) calculates that as much as 400 billion dollars (320 billion euros) could be tied up as collateral to cover derivatives exposure."
The IEA also noted that a new study commissioned by the OECD on the impact of funds specialising in investing on market indices, which are derivative instruments based on the underlying market, "argues that changes to regulations could have unintended negative impacts."
The IEA explained: "By way of example, the study reports that limiting participation of fund investors may unintentionally deprive futures markets of liquidity and risk-absorption capacity."
In other words, the IEA appeared to be highlighting concerns that the proposed new rules, by raising costs and restricting activities, could reduce activity and the amount of money, known as liquidity, on the supply and demand sides of these markets. This would raise a risk that at times of stress, the ability of markets to adjust and absorb the strain would be reduced.
The IEA also said that discussions in the United States had already considered imposing limits on commodity trading in West Texas Intermediate (WTI) benchmark oil, heating oil, RBOB gasoline (petrol) and natural gas futures contracts, but it was not yet clear if a common line would emerge.
The European Union was due to make its final proposals for regulations in September.
"Ten of Europe\’s largest industrial companies have warned that enactment of the EU\’s clearing threshold proposals risks sparking a new financial crisis," the IEA noted in its special passage on the subject.