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Totem polls the market for consensus prices

Energy derivatives

A new consensus pricing service for energy derivatives could help cast light on the murky world of energy derivatives trading and the endless scandals that it seems to generate.

Enron's energy derivatives trading business was at the heart of the scandal that brought down what was once America's seventh-largest company. It now appears, though, that Enron was merely the initiator of a trend for energy derivatives traders to get involved in financial malpractice. Dynegy, Duke Energy, and even that paragon of risk-aversion, Royal Dutch/Shell, have all found themselves embroiled in scandals relating to how they valued their energy derivatives trades.

Of course some also engaged in round-trip trades to beautify their books, so it may be unfair for Shell to appear with them in the same sentence, but the tendency of the energy derivatives market to generate scandals suggests that there may be serious problems with marking these contracts to market.

Part of the problem is that a large proportion of energy (including oil and gas) derivatives are traded in over-the-counter (OTC) markets that are unregulated and opaque to all but the traders involved.

Another aspect that complicates the process of ensuring that the value of contracts is accurately marked according to their market price, as required by law, is that many of these contracts are extremely illiquid.

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