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
Date Written: May 16, 2013
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: Suggested Citation