How the Dodd Frank Act is Going to Affect Energy Trading

The recent economic meltdown that was sparked off by a decade of rogue bank activity due to gospel banking deregulation has caused the legislature to take notice and change their Modus Operandi. They have responded to the economic meltdown by choosing to create the Dodd-Frank Act to restore some semblance of regulation into the economy. This act was mainly targeted at regulating the banking industry in the economy by increasing federal oversight. However, this has not stopped it from affecting the nature of energy trading in the near future and past the foreseeable present.

The first notable effect has been the regulation of hedge funds. These are private resources pooled into an investment fund by their owners. It allows private individuals to pool their funds and invest together in whatever business they choose to. These hedge funds were heavily invested in energy trading. They have had their asset base increased to a hundred million dollars threshold, but this has not come without cost. These investment vehicles will now be regulated and overseen by the SEC. They will need tools to help with Dodd-Frank compliance. This is because they have been mandated to inform the SEC on their trading activity and investment portfolios. This will assist the market regulator to assess market risk and control it. This will make investing in energy a bit harder to do. This will stabilize the energy market and may lead to a gradual increase in the overall cost of investing in this sector. This is because the cost to benefit ratio may go down as the regulators come in.

The second effect is that Dodd-Frank compliance will affect the derivatives market tremendously. This market has been self regulated for a long time now. This has allowed to it to grow to about ten times the entire global economic output. As is clear, this scenario will no longer be allowed to exist. The trading of derivatives is being brought under the jurisdiction of clearing houses. The companies that trade in derivatives will have to do so under the watchful eyes of regulators. A large portion of these derivatives is pegged on the energy sector commodities such as oil and gas. This will reduce the amount of derivative buying that is going on in this sector. This may actually bring down the global prices of these commodities if properly implemented. There are exceptions for companies that are directly involved in energy which will allow the market to be led by rational investment.