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Oil Market-Maker Closes Shop On Unfavorable Regulations

Crude by rail

Geneva Energy Markets, a leading oil derivatives trader has liquidated its trading book after it incurred “significant losses” after its clearing bank’s insistence that it reduce its holdings, the FT reports, citing a source close to the market maker.

Before, GEM traded between 50 million and 100 million barrels of crude oil and oil products on a daily basis, focusing most on futures. But since last year it also took part in the options segment. The company was specialized in the over-the-counter market.

However, a tightening regulatory framework in Europe, where the company is also active although it is based in the United States, prompted its clearing bank to suggest a sharp cut to GEM’s open interest to avoid being hit with much higher capital requirements in order to be able to clear trades in futures and options.

The regulation in question is part of the Basel III financial market regulatory framework that deals with the ratio between capital and leveraged exposure. In other words, the ability of any one player on the financial market to meet its financial obligations.

GEM managing partner Mark Vonderheide told Bloomberg in an interview that the entry into effect of this regulation meant that GEM’s clearing bank would have to hold capital based on the trading firm’s gross, rather than net, exposure.

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"The notional value of our book was in excess of $50 billion," Vonderheide told Bloomberg, adding "However, the actual risk of the book was always relatively low, with at value-at-risk at around $2 million at any given time. The change to gross exposure meant a significant increase in capital requirement for our clearing bank, and we were asked to reduce our positions massively."

The founder of the company also said that "The new regulation is seriously damaging the liquidity in the energy market. If the regulation was intending to create a safer and more efficient market, it has done completely the opposite."

Meanwhile, the FT notes, open interest in oil futures on the New York Stock Exchange and ICE Europe recently dropped without any obvious reason.

By Irina Slav for Oilprice.com

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