COMMODITY DATA MANAGEMENT Figure 1: The Forward Curve & Associated Tenor Points 100 Curve at 10 Dec 2011
• A curve is built up from a series of values for specific delivery periods (tenors)
• Tenors can represent either an absolute point in time or a time relative to when the curve was produced
Tenor Curve
0 (Feb 12) (Mar 12) (Apr 12)
MO2 MO3 MO4 MO5 (May 12)
MO6 (Jun 12)
Brothers and the US government bailout of AIG, targeted regulation has been proposed by the G-20. This involves a strong commitment to establishing regulatory frameworks for OTC derivatives that reduce risk and increase transparency in the OTC market.
Fair Value Assessments Q03 (Q03 12) Q04 (Q04 12)
Y02 (2013)
certain thresholds. However, commodity participants may be shielded under the ‘non-financial counterparty’ definition by exemptions for genuine hedging “… or providing investment services in commodity or exotic derivatives to clients (of their main business), provided that activity is ‘ancillary’ to their or their group’s main (non-investment/banking services) business.” Although this legislation was inevitable in the aftermath of
A quick glance at some annual accounting statements shows the use
of forward curves in the application of ‘fair value’: – Glencore’s 2011 Annual Accounts Page 113 notes “… fair value is estimated by reference to forward market prices”.
– BP’s recent Quarterly 2012 Group Results, Page 20 notes “… derivative commodity contract is entered into on a fair value basis using forward prices consistent with the contract maturity”.
– BG Group 2010 Annual Report, Page 33 notes “… BG Group calculates the fair value of medium and long-term debt and derivatives by using market valuations where available or, where not available, by discounting all future cash flows using the relevant market prices and yield curves at the balance sheet date”.
In Europe, this takes the form of
the European Market Infrastructure Regulation (EMIR). This regulation will mandate central clearing of standard OTC contracts through CCPs, while imposing risk mitigation standards for non-centrally cleared contracts. Examples of current CCPs clearing OTC derivatives include ICE Clear Europe and ICE Trust for CDS. In addition, more onerous
reporting requirements are on the way. The obligation for clearing will be applied to both financial and non- financial counterparties that exceed
58 June 2012
the financial crisis, there will be significant financial burdens on market players. These include new costs and fees, increased regulatory burdens and potential penalties that may strengthen the case for a more staggered pace of introduction to help reduce costs and business interruption. There is little doubt that this legislation is wide-reaching and significant in the day-to-day operations of ‘financial counterparties’, and will impact the mark-to-mark process and end of day Value-at-Risk (VaR) calculations and risk assessments. The EMIR regulation is awaiting formal approval
with a target date of the beginning of 2013, although many industry observers anticipate a delay. It is not by chance that this far reaching EMIR regulation has seen some changes to Fair Value Accounting
Standards that will come into force at the same time.
Fair Value Accounting Fair value accounting provides a code of standards and practices
for the measurement of the value of financial instruments on the current price of the asset or liability, for similar assets or liabilities, or based on another objectively assessed ‘fair’ value. The code has been established to provide a rational and unbiased estimation of the value of the commodity, with value changes recognised in the profit or loss. These codes include Financial Accounting Standard 157 – Fair Value Measurements (FAS 157), which details the framework for measuring fair value for firms reporting their financial statements based on US Generally Accepted Accounting Principles (GAAP) and International Accounting Standard (IAS) 39. It also provides
Source: DataGenic
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