The sale of Citigroup’s Phibro inhouse energy trading unit to Occidental raises again the question of reform of over-the-counter derivatives trading.
Followers of this arcane but vital topic may recall a column I wrote last week advising regulators and politicians not to treat financial and non-financial companies differently in upcoming reforms of OTC derivatives trading. Industrial companies have been lobbying heavily for an exemption and are having some success.
The issue is whether non-financials, when they buy and sell standard derivatives contracts, such as interest rate and credit default swaps, should be required to have the contracts centrally cleared. That would mean them, inconveniently, having to put up cash collateral against their contracts.
My column covered some of the reasons why allowing industrial companies to escape the requirement would be risky and this FT editorial laid out further points. The FT also carried a thorough analysis of the issue this week, explaining the non-financials’ case.
So my question is this. Occidental, along with BP and Shell, is a non-financial company but the acquisition of Phibro makes it quite clear that it has considerable financial exposures. A lot of trading in energy markets is done through derivative contracts, both OTC and exchange-traded.
If non-financials are treated differently from financials, that presumably means that, when a quasi-hedge fund such as Phibro passes from a financial owner to a non-financial, the rules under which it trades and clears its derivative contracts would be relaxed.
That makes little sense to me and I remain sceptical about excepting non-financials.
