Trader Geneva Energy Markets suspends operations

Crude and refined products market-maker Geneva Energy Markets (GEM) has suspended operations because of increased capital requirements placed on its clearing bank, its top executive said.

Basel III regulations forced GEM's clearing bank to require more capital from the company, which forced GEM to sell off its trading book worth more than $50bn, GEM managing partner Mark Vonderheide told Argus. A number of companies and lawmakers have said the requirements could threaten liquidity in some markets by lead some banks to stop clearing trades.

GEM traded crude futures contracts, such as WTI and Brent, as well as diesel, gasoline and natural gas futures. It helped provide liquidity in a number of markets as it served as a counterparty to many large traders. GEM has offices in New York, Chicago and London.

Vonderheide said the company suspending operations was not related to risky trading positions.

"In fact we have been running a book with lower risk recently, much lower than we normally have," he said. "It has to do with our clearing bank being required to post too much capital for the kind of gross open interest we had."

Vonderheide criticized the Basel III regulations, saying that they should focus on net open interest instead of gross open interest. He gave the example of a company taking a short position on a financial product — betting the price will go down — and be long position on a different product. Instead of viewing the contracts together, as a hedge, the new regulations view contracts independently, which distorts the overall risk carried on the books, Vonderheide said.

"It's using a methodology for calculating risk-rated assets [that] is not accurate," he said. "In fact, in many ways, it's completely contrary to common sense."