Based on our conversations with hundreds of commodity hedgers, its safe to say that many, if not most, participants in the energy commodity markets, especially end-users such as consumers, marketers, producers, processors, etc., are not strong advocates of Dodd-Frank (as well as EMIR and similar market regulations around the world), primarily because said regulations far too often limit their ability to manage their commodity, foreign exchange and interest rate risk as they would choose to do and did for many years. That being said, a new, unintended consequence of Dodd-Frank has surfaced in the crude oil derivatives market in recent weeks. The unintended consequence being that trades which are being submitted to SDRs (swap derivative repositories) are providing other market participants with far more details of the transactions than many were led to believe would be the case.

First, a little background on SDRs. Per the CFTC, "SDRs are entities created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) in order to provide a central facility for swap data reporting and recordkeeping. Under the Dodd- Frank Act, all swaps, whether cleared or uncleared, are required to be reported to registered SDRs. The Dodd-Frank Act added new Section 21 to the Commodity Exchange Act (“CEA”), governing registration and regulation of SDRs and establishing registration requirements and core duties and responsibilities for SDRs. The Commission, in turn, has promulgated the Part 49 regulations implementing Section 21. SDRs are required to register with the CFTC and comply with rules promulgated by the CFTC, including real-time public reporting of swap transaction and pricing data." As of today, there are four SDRs which are run by affilates of CME, ICE, DTCC and Bloomberg.

Back to the subject at hand, in recent weeks, at least two large crude oil trades, allegedly associated with Mexico's oil hedging program, have appeared on an SDR's system, including information which one could argue identifies the Mexican governments as one of the counterparties. While the SDR's system doesn't identify the counterparties by name, it reveals nearly every other relevant detail of the trades including the type of transaction (in this case a put option) the tenor, volume, strike price and option premium in the case of one of the trades, a "trade code" of “MAYAPLBOM”. The code itself is the major problem as the market consensus is that is stands for Maya crude oil, a blend of the crude oils produced by Pemex in the Cantarell and Ku Maloob Zaap fields in Mexico. Interestingly enough, the next similar transaction to appear in the SDR's system was not labeled MAYAPLBOM but "petroleum and other products."

For those of you who are curious about the details of the trades, the tenor is through November 2015, the volumes are 5 million barrels, the strike prices are $80/BBL and the premiums are $2.51/BBL and $1.57/BBL, respectively. Last night, Reuters confirmed that Mexico has indeed been executing trades for its 2015 oil hedging program in recent weeks, quoting Mexican Finance Minister Luis Videgaray who simply stated, "It is a gradual process and we have started to execute it." Assuming the previously mentioned trades do belong to Mexico, Videgaray and his colleagues have to be quite unhappy that an SDR has provided the market with all of the necessary details, even more so given that they typically spend hundreds of millions of dollars per year in option premium ($450MM in 2014).

At the end of the day, there is something to be said for the data which SDRs can provide to regulators, but too much transparency, especially in real-time or even near-real-time, could force some market participants, such as Mexico, to need or want to execute future transactions in jurisdictions and/or with counterparties which are not subject to CFTC regulations. Efficiently executing large complicated trades such as the two previously noted transactions can be challenging even when the market is liquid and your intentions and/or positions are unknown to market. Doing so in a less liquid market or when your hand has been shown is a nearly impossible task for even the most skilled traders. And it appears that at least some in the Mexican government share our opinion and have for several years. In an article which appeared in Energy Risk in late 2009 (see Mexico hedges oil price at $57 in 2010) then Mexican minister of finance, Agustín Carstens, seemed to have the ability to look into the future when he said, “Liquidity in markets should be assured and flexibility should be supported. Without that, hedging programmes such as ours would be unthinkable."