ASIC today released Report 390 Review of OTC electricity derivatives market participants’ risk management policies (REP 390).

REP 390 summarises the findings of our review of the written risk management policies of Australian financial services (AFS) licensed entities that trade in over-the-counter (OTC) derivatives in the wholesale electricity market in Australia.

REP 390 sets out our findings that:

• no areas of significant concern were identified

• risk management policies appeared to be appropriate to the nature, size and complexity of the financial services business being conducted, and

• risk management practices varied amongst AFS licensees.

'This is a good news story for this market sector. It indicates that, based on the written policies and documents that we were provided with, these AFS licensees generally comply with their legal obligation to have adequate risk management systems,' Commissioner Greg Tanzer said.

Another outcome of the review was the development of the Benchmark Electricity Risk Management Calculator, or 'BERC'. The BERC is a self-assessment tool that may be used by an AFS licensee to measure their risk management policies and practices against their peers.

ASIC is providing the BERC for information and educational purposes only.

Mr Tanzer said, 'Use of the BERC is entirely at the option of the licensee. We understand the close connection between the physical and financial services electricity markets and the risks that arise as a result. While we do not regulate the physical market, we hope our providing the BERC for our stakeholders' voluntary use will bring some transparency to how the market we regulate manages their risk and be beneficial to the physical market also.'

The review was undertaken as part of ASIC's regulation of AFS licensees who trade in these financial products. It is independent of the work of the Council of Financial Regulators in implementing Australia's commitment to the G20 reforms to OTC derivatives markets.

ASIC acknowledges the assistance of those entities and organisations that took part in the review.

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REP 390

Background

Participants in the physical electricity market deal or make a market in OTC derivatives relating to the wholesale price of electricity as part of their ordinary course of business. They are therefore required to hold an AFS licence with appropriate authorisations. While ASIC is responsible for licensing and monitoring the financial services provided by these market participants, it has no role in regulating the physical electricity market. Agencies which regulate the physical electricity market include the Australian Energy Market Commission, the Australian Energy Market Operator and the Australian Energy Regulator.

In Report 320 Response to submissions on CP 177 Electricity derivative market participants: Financial requirements (REP 320) ASIC indicated it had concerns about the risk management practices of these AFS licensees. The review giving rise to REP 390 was conducted to address these concerns.

In conducting the review, we principally focused on the content of the written risk management policies and practices of AFS licensees. We did not undertake a comprehensive review of how licensees implemented their risk management policies.