Life Cycle of an Energy Derivative

The talk in energy markets is about skyrocketing energy prices. Yet, key legal and operational risks in the global use of energy derivatives remain a mystery, even to many practitioners in this rapidly growing global industry. Transacting energy derivatives is detailed and document intensive. The very architecture of energy trading derivatives' front, middle, and back office functions can present numerous challenges both to on-site and off-site bank examiners, regulators, auditors, and compliance professionals. These professionals require specialized and routinely upgraded skills to meet their demanding objectives.

This two-day interactive course is tailored for auditors, regulators, bank examiners and supervisors, and compliance professionals who need to understand the operational and legal risks of major energy derivatives. The course will consist of an interactive lecture and in-depth exercises. Additionally, relevant articles highlighting recent regulatory, examination, and risk trends in energy derivatives will supplement this course.

15-Dec-2008 -- 16-Dec-2008New YorkUSD$2375
NY Institute of Finance - Midtown9:00am - 4:30pm Instructional Method:
Group-Live
Instructor(s): [ Mayra Rodríguez Valladares; ] Mon Tue Level: Basic
CPE Credits: 14.0

Auditors, regulators, bank examiners and supervisors, and compliance professionals who need to understand the operational and legal risks of major energy derivatives.
No advance preparation required.
Students will be able to:
  • Review mechanics of key energy derivatives
  • Evaluate major components of ISDA Energy Annexes
  • Compare and contrast responsibilities and best practices of banks' front, middle, and back offices (importance of operations to avoid systemic risk)
  • Identify key elements in the life cycle of energy derivatives
  • Apply concepts in the course to an audit or risk based supervision examination for energy derivatives at a financial institution and a corporation
Introductory understanding of financial derivatives
  • Derivatives in Energy Markets
  • Oil Company Financial Analysis and Valuation
    • Day I
    Module I: Managing Risks of Energy Products
    • Define risk
    • Review risks that can arise from energy products: credit; market; liquidity; strategic
    • Evaluate evolving definition of legal risk: documentation; compliance
    • Evaluate evolving definition of operational risk: people; processes; technology; external influences
    • Compare and contrast best practices to effective risk management steps
    Case Study: Enron and Special Purpose Entities

    Module II: Overview of Key Energy Derivatives

    • Review mechanics of key energy derivatives and how they are used to hedge or speculate
    Case Studies: Amaranth and Operational and Market Risk; BP Price Manipulation

    Day II
    Module III: ISDA Documentation
    • Identify key energy product related components of the ISDA documentation:
    • - ISDA Commodity Definitions and User's Guide to the 2005 ISDA Commodity Definitions
    • - North American Gas Index
    • - Power Annex North America
    • - Gas Europe
    • - Power UK
    Reading: participants will select several of the above ISDA documents to read and analyze

    Module IV: Energy Trading Operations

    • Describe organizational structure and best practices expected at a front office (identify transaction flow and reporting)
    • Describe organizational structure and best practices expected at a middle office
    • Identify key areas of a back office and expected best practices for operations:
    • - Internal controls
    • - Ticket flow
    • - Trade transactions (Confirmations; Clearance - netting and its uses; discuss role of clearance facilities; DTCC)
    • - Evaluate requirements for margin
    • - Settlements: discuss risks during settlement process
    • Foreign payments
    • Reconciliations
    • Discrepancies and disputed transactions
    • Revaluation
    • Documentation and record keeping

      Exercise I: participants will break up into groups to discuss and apply key components of a risk based bank examination or audit of an energy trading function. Emphasis will be for participants to put together best practices that examiners and auditors are looking for throughout the front, middle and back offices of an energy trading group.

        Exercise II: participants will break up into different groups from the previous exercise. They will walk through a ten-year oil swap and another energy derivative of their choice from the point after a deal is agreed through final maturity. Scenarios exploring possible risks during the instruments' life time will be explored.

    Clients who register for this course will receive a complimentary 6 month subscription to the Financial Times and FT.com. The Financial Times is the world's most respected financial newspaper, providing a broad assessment on finance, business and the industrial sector. Subscriptions will start within 6-8 weeks of the application process and are limited to one per client. For questions about your subscriptions call 800-628-8088 or email uscirculation@ft.com. US and Canada enrollees only.

    Lunch included for all students taking day classes.