Top Oil Market-Maker Closes After ‘Damaging’ Regulatory Changes

(Bloomberg) -- Geneva Energy Markets LLC, one of the largest market-makers in crude oil and refined products, has shut due to regulatory pressures related to capital requirements for clearing banks, its top executive said.

GEM recently liquidated its trading book that previously held "millions of barrels of open interest across crude oil, refined products and natural gas," managing partner Mark Vonderheide said in an interview.

"The notional value of our book was in excess of $50 billion," Vonderheide said. "However, the actual risk of the book was always relatively low, with at value-at-risk at around $2 million at any given time."

The New York-based company -- a staple of the U.S. and European oil market, providing liquidity by trading with other participants including big trading houses, producers, refineries and oil consumers -- is the first known commodities firm to fold after new rules were implemented earlier this year by European regulators related to what’s known as leverage ratios.

Basel III

Basel III leverage ratios -- the ratio between capital and so-called leveraged exposures -- are a financial measure that assesses the ability of a company to meet its financial obligations. Critics say that leverage ratios punish banks by requiring capital backing for those assets as if they were riskier. Vonderheide said that GEM was hit as new regulation forced its clearing bank to hold capital based on their gross exposure, rather than net exposure.

"The change to gross exposure meant a significant increase in capital requirement for our clearing bank, and we were asked to reduce our positions massively."

The problem is particularly acute for traders dealing in relatively less-liquid portions of the maturity curve. "Longer-dated trades are more capital-intense so this impacts liquidity in an adverse way," said John Saucer, vice president of research and analysis at Mobius Risk Group in Houston.

Geneva Energy Markets, or GEM, was founded about a decade ago by managing partner Vonderheide, a 30-year veteran oil trader, having worked at Exxon Mobil Corp., Royal Dutch Shell Plc, Vitol Group and Morgan Stanley. Vonderheide was between 2005 and 2007 the global head of oil trading at Deutsche Bank AG.

The privately owned company, which described itself as the "leading" over-the-counter market-maker in energy benchmarks such as West Texas Intermediate and Brent crude, had offices in London and Chicago in addition to New York.

"The new regulation is seriously damaging the liquidity in the energy market," Vonderheide said. "If the regulation was intending to create a safer and more efficient market, it has done completely the opposite."

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