The last session of this year’s IDX-V was titled “Commodities in Focus,” the only panel of the third day, which itself was titled “Commodities and the unexpected consequences of COVID-19.”
Joanna Williams, Of Counsel at the U.K. law firm Simmons and Simmons, moderated the panel. The participants were all European and the focus remained on conditions in European commodity markets, except for a brief excursion to Cushing, Oklahoma, the proud home of negative oil futures prices, for a thankfully brief mention of the April oil price crash.
This was, at any rate, a panel dominated by energy and power derivatives, a dominant commodity in European trading.
The panelists were Paul Dawson, Head of Regulatory Affairs, RWE Supply & Trading; Steffen Riediger, Director, European Power Derivatives, European Energy Exchange; Paul Willis, Technical Specialist, Commodities, Financial Conduct Authority; and Guy Wolf, Global Head of Market Analytics, Marex Spectron Group.
The session began with discussion by Paul Willis from the U.K.’s FCA, who told us about the international cooperation and coordination among regulators under the aegis of the international regulators group, IOSCO. FCA even created a very useful repository of regulatory actions by IOSCO members in response to the pandemic.
According to Willis, the FCA early on considered a number of measures intended to relieve some pressures from regulatees but realized that given the automated nature of so many operations, relief might in fact cause further stress as processes were re-programmed and might also elevate operational risks. The FCA decided to hold off on those measures, although Willis did mention later that other relief was provided for practices that were difficult to implement outside of office settings.
Guy Wolf from Marex Spectron noted that the current crisis is far different from 2008’s financial market collapse, although there had recently been a troubling build-up of risk in the credit markets that had to be worked through. This time around, post-2008 reforms allowed the central banks to “step in quickly’ when those markets seized up.
In other markets the crisis blew up the reliance that had developed on correlation as a trading strategy. Wolf pointed out how in the world of retail, for example, online shopping was thriving but travel and dining had been punishingly hit.
Wolf also said that the transition to working from home was remarkably smooth in light of the fact that most business continuity planning envisioned closing one or more sites with employees congregating at another location. This scale of working from home that the business experienced was not something that was rehearsed and practiced ahead of time.
Steffen Riediger from EEX echoed the sentiments about how smoothly things had run. He said that when China started shutting down in January, EEX began to review its contingency planning. By the time in mid March when EEX sent its workers home, it was clear that the exchange infrastructure was sufficiently reliable and resilient.
Riediger also said that EEX’s clients were not having problems with the new environment. So smooth has been the transition to working from home for EEX staff and customers that EEX could successfully launch a new suite of Japanese products.
The most provocative, and positive, remarks were offered by Paul Dawson from RWE, a German-British energy supplier. He said that the “big green recovery plans” for the European Economy that are floating through the legislative process offer policy makers the opportunity to address “decarbonization” and invest more into sustainable energy and other businesses. Dawson thinks the pandemic will lead to acceleration of the integration of renewables into the power industry.
Dawson’s remarks also highlighted the numerous issues that lurk in the shadows of Brexit discussions. The energy and emissions-trading sectors still do not know if there will be a separate trading scheme or parallel schemes or any schemes at all after Brexit and the transition period. Dawson said Europe may have to re-think its commodities regulations fundamentally after Brexit because, except for electricity and emissions, commodity trading for the most part is centered in London, which will be outside of the E.U.’s regime.