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Dodd-Frank uncertainties could lead to increased energy costs

Dodd-Frank regulations on derivatives that took effect earlier this month have caused a degree of uncertainty for energy companies, which may see costs increase as a result of the legislation.

Last month, the Edison Electric Institute, the American Gas Association and the Electric Power Supply Association warned that the uncertainty caused by swaps regulations “still in a state of flux” could result in higher energy costs for American consumers, Reuters reports.

Additionally, the groups said that market participants could be discouraged from engaging in certain trading transactions that may increase risk management costs for commercial swaps end-users, which could result in even higher costs for consumers.

A number of energy firms, however, are moving out of trading in swaps into similar futures contracts. The swaps market is facing a Dodd-Frank overhaul, but the futures market has been regulated in much the same way for many years, according to The Wall Street Journal.

CME Group, Inc., the largest futures exchange, said that the daily average of swaps traded the week before the implementation of new swaps regulations on Oct. 12 was 313,885. That number fell to 140,394 the week after implementation of the new rules.

Firms can use swaps to hedge against fluctuating costs, such as electricity or gas, though switching to futures could mean they will be required to hold extra cash to pay the daily margin, The Wall Street Journal reports.

Energy firms that decide to leave the swaps market can avoid being designated as swap dealers, which would require the firms to hold extra capital and follow new ownership rules effective Jan. 1.

“Almost all of our customers informed us that they preferred to trade energy futures rather than swaps to avoid the uncertain swaps regulatory regime,” Chris Giancarlo, executive vice president of GFI Group, said, according to The Wall Street Journal.

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