Committee of Chief Risk Officers releases best practices recommendations

The Committee – a diverse coalition of 31 energy companies – said it had developed best practices in the governance, valuation, credit risk management and disclosure aspects of merchant energy operations after receiving input from regulators, credit rating agencies, securities analysts and accountants. The recommendations come at a time when the energy trading market is experiencing credit rating downgrades, market exits and regulatory threats.

"One of the most far-reaching changes we hope our industry will embrace is to settle transactions through a clearing mechanism that allows market participants to 'net' positions, thereby reducing the overlapping and unnecessary collateral required by individual transactions," said Bob Stibolt, senior vice-president of risk management at Tractebel North America, a founding CCRO member.

The CCROs also urged merchant energy companies to minimise operational risks by strict segregation of responsibilities for trading, valuation and accounting. Furthermore, the Committee said it is vital for companies to develop risk metrics for internal management and external disclosure, and to evaluate the effects of sudden and extreme events on the company's overall trading portfolio. Other CCRO recommendations included the separation of proprietary trading activities from other merchant energy activities.

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