Corporate Production and Hedging Decisions Under Dodd-Frank and EMIR

Abstract

We explore the consequences from the two regulatory frameworks Dodd-Frank and EMIR for industrial corporates. We point out that - by falling under the clearing obligation - not only the corporate’s option to decide freely on its positioning within the well-known “Risk Triangle” is extinguished but that real production decisions are affected negatively as well. We discuss how the impact of the liquidity constraint can be softened by carrying a liquidity buffer, which is adjusted dynamically to cap the probability of illiquidity at a desired small percentage. For exposition we explore the concept of margin at risk for a prototypical power producer and illustrate which type of model is required to determine the size of the liquidity buffer and how the buffer can be set up practically.

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