Content for Energy Risk USA

Pocast: Kaminski on lessons from commodity market defaults

Professor Vince Kaminski analyses Nasdaq and PJM defaults

Vince Kaminski is a professor in the practice of energy management at Rice University’s Jesse Jones Graduate School of Business. In this podcast he examines the recent spate of commodity defaults, looking at why they occurred and whether enough has been put in place to avert future calamities. 
He looks at the types of commodities trades most prone to defaults and asks whether clearing is just simply too risky for some very complex and illiquid trades. 
He compares the similarities between the €114 million default at Nasdaq in September 2018, and the June 2018 default in the PJM power market, which left PJM members picking up a bill for around $165 million. He points to a failure of risk management in both defaults, both in the case of defaulting entities and the trading venues.
As well as increased credit checks, more should be done by central counterparty clearers (CCPs) to monitor positions on an ongoing basis, Kaminski argues, using a combination of traditional value-at-risk tools and creative stress tests. The quality of risk management should be a critical consideration in determination of initial margin, allowed position limits and position concentration levels, he says.
Kaminski is supportive of many of the recommendations for CCPS that have been made in recent years by regulatory bodies and industry associations. He points to two documents in particular: CCP Best Practices published by the International Swaps and Derivatives Association in January 2019; and Resilience of CCPs: Further Guidance on the PFMI (Principles for Financial Market Infrastructures) published by the Bank for International Settlements and International Organization of Securities Commissions in July 2017. 
Implementation of these recommendations will take time as it requires developing complex computer systems – a resource intensive task, he says.
Kaminski will be speaking in depth on these issues at Energy Risk USA which takes place between May 13th and 16th in Houston.

Podcast: Ronn on using a financial-economics approach to forecast crude oil spot prices

Professor of Finance talks about using equity, index and crude-oil options to forecast spot prices

Ehud Ronn is Professor of Finance at the University of Texas at Austin. In this podcast he talks about his latest research into forecasting oil prices by using equity, commodity and market options to infer idiosyncratic variances for individual oil stocks and forward-looking betas for oil futures contracts.
These signals, taken alongside other forward-looking measures, such as the Chicago Board Options Exchange’s (CBOE’s) Volatility Index (VIX) and the CBOE S&P500 Implied Correlation Index (ICJ), provide the “Message from Markets,” says Ronn.
By using both historical and implied data, Ronn is able to calibrate term structures of equity betas and idiosyncratic variance. For example, the research identifies periods when stocks' idiosyncratic variance tends to drop ahead of a systemic crisis. Similarly, a rise in idiosyncratic variance during a crisis tends to signal the end of the crisis is nearing.
Regarding oil prices, Ronn’s method results in price forecasts that are expressed in terms of the futures prices for the corresponding maturity plus or minus a risk differential.
Ronn will be presenting this research at Energy Risk USA in Houston on Wednesday May 15. Energy Risk USA runs between May 13 and 16, 2019.