Behind each of them, remember there is a Bank.
ex: when X with no assets bids at $7/dekatherm DES Asia and snaps the volume while the one with billion dollars lng plant cannot go below $8 (3.00 + 115% of Hub + Shipping+ Credit Risk.
Traders are allowed to survive in this 1% subdued margins race because of this bank money.
Behind Gazprom, a German Bank.
Is 50%+1 Kremlin-owned so assets pledge is unlikely.
Has maintained an unbroken track record of debt service – even during times of sovereign default and the 1998 russian financial crisis.
Has positive free cash flow generation for the past 10 years.
Gazprom Marketing and Trading (GM&T)
Juridically located outside Russia is Gazprom’s global energy marketing and trading company.
Has an expertise in trading physical natural gas in the european and global markets.
“We invite banks with physical capacity to discuss the structure in more details, and those banks that do not have physical capacity can use us to manage deals with physical flow*”.
Gazprom invites commodity finance banks to use GM&T limited to make loans with others counterparties in gas trading. Basically Repos. What are the risks of this invitation ?
Risk Dimensions of Over the Counter Power and Gas Trading
The entities active in trading in the gas and power markets are very diversified in terms of size, strategies and creditworthiness.
A wide range of gas and power products that can be tailored to specific needs are traded OTC: standardised or ad hoc, in various hubs (gas), in terms of volumes, in terms of physical delivery, in terms of price reference (index, fixed…), tenor (hour, day, month,
Contractual terms, including in particular payment terms, are standardised.
Focus on: The settlement cycle
Gas and power transactions involve flows and potentially a large number of overlapping individual transactions.
The “hard” side of credit mitigation:
Netting between individual transactions and across products: The Master Agreements.
The impact of the country of incorporation and time-zone on close-out netting.
Termination vs. binding nature of committed gas and power transactions.
Reactivity and rapidity : key attributes in a market with high speed, high quantity of transactions and fundamentals reflecting the wider economic environment.
What is credit exposure in trading markets?
They are two main components: settlement risk and mark-to-market
Focus on: Settlement Risk
With swaps and forward contracts, settlements take the form of two-way payments. Two-way payments create the problem that one party could be when a bank makes a payment to a trading counterparty but will not be recompensed until some time later; the risk is that the counterparty may default before making the counterpayment.
Focus on: Mark to Market
To mark-to-market is to calculate the value of a financial instrument (or portfolio of such instruments) at current market rates or prices of the underlying.
The “soft” side of credit mitigation: knowledge of the market dynamics and various players. (FT, have insiders or read Navigating the Commodity Markets with Freight)…
Manager of commercial relationships and mastering the art of commodity merchandising, Simon Jacques is a long-term strategist of agricultural and energy merchant assets with complex risk fundamentals applied to a macro view on price and non-linear dynamics.
Simon is a certified Energy Risk Professional, “the gold standard of Energy Markets” as distinguished by the prestigious Global Association of Risk Professionals.