Coping with the Clearing Obligation - From the Perspective of an Industrial Corporate with a Focus on Commodity Markets

Posted: 16 May 2013 Last revised: 17 Oct 2014

See all articles by Frank Lehrbass

Frank Lehrbass

L*PARC (Lehrbass Predicitive Analytics and Risk Consulting); FOM University of Applied Sciences for Economics and Management; University of the Bundesbank

Date Written: May 16, 2013

Abstract

The European Markets Infrastructure Regulation (EMIR) allows to burden a clearing obligation on non-financial corporates, which formerly did not necessarily clear their business. We give ten recommendations on how to cope with this obligation. These are motivated by a case study for which we consider a stylized German power producer. For this entity we derive optimal levels of planned production and forward sales of power using micro-economic theory. Since this results in a significant short position in the German power forward market, we investigate the resulting variation margin call dynamics with a special interest in the ability to forecast worst case price upmoves. We compare different models for the forward log returns and their performance in 99% quantile forecasting. A GARCH model with Student-t distribution emerges as the most suitable model. This is used in the case study, which is inspired by data published by the power producer E.ON. Using recent material from the Basel Committee on Banking Supervision we distill the reliable liquidity buffer from an allegedly rich liquidity position and show how suddenly it can be eroded. We point to feedback loops, which make the challenges - posed by the clearing obligation - even more severe.

This working paper has been submitted to the 9th Energy & Finance / 4th International Ruhr Energy Conference in Essen, Germany.

Keywords: industry risk management, corporate risk management, liquidity risk management, liquidity buffer, liquidity value at risk, margin at risk, treasury management, EMIR, Dodd-Frank

JEL Classification: C3, D2, E5, F2, F3, G1, G11, G17, G2, G28, G3, K23, L1, L9, M1

Suggested Citation

Lehrbass, Frank, Coping with the Clearing Obligation - From the Perspective of an Industrial Corporate with a Focus on Commodity Markets (May 16, 2013). Available at SSRN: https://ssrn.com/abstract=2265792 or http://dx.doi.org/10.2139/ssrn.2265792

Frank Lehrbass (Contact Author)

L*PARC (Lehrbass Predicitive Analytics and Risk Consulting) ( email )

Dusseldorf
Germany

HOME PAGE: http://lehrbass.de

FOM University of Applied Sciences for Economics and Management ( email )

Toulouser Allee 53
Dusseldorf, 40476
Germany

University of the Bundesbank ( email )

Schloss
Hachenburg, 57627
Germany

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