Living with Dodd Frank: The Hedging Market
Interview with Freddy Cardozo, Vice President, Supply and Risk Management, Gas South
A major topic right now in the investments world is the impact of regulatory changes on hedging
strategies and the new compliance requirements for end users after Dodd Frank. Energy market
variables are multiple and numerous: volumetric uncertainty, volatility and liquidity are the main
factors that can affect energy’s portfolios. Effective risk management and the ability to respond to
valuation challenges are the tools available to optimize investments, mitigate risks and generate
Freddy Cardozo, Vice President, Supply and Risk Management, Gas South recently spoke with Global
Financial Markets Intelligence (GFMI) about key topics to be discussed at the upcoming GFMI
Intelligent Hedging and Portfolio Optimization for the Energy Markets, October 24-25, 2013, in
Houston. All responses represent the view of Mr. Cardozo and not necessarily those of Gas South
and its subsidiaries.
What needs to happen for energy companies to better understand how to implement
Dodd Frank into their procedures?
FC: At least from the standpoint of an end-user, with a relatively simple set of derivatives used for
hedging, I believe a significant portion of the uncertainty around Dodd-Frank regulation has already
been alleviated. In my opinion, the industry came to reasonably good solutions with the ISDA Dodd-
Frank protocols and market participants having streamlined many of the complexities around these
regulations. Still, many details will continue to surface and it may take at least a few years for Dodd-
Frank to be completely assimilated by the market participants and for them to fully implement it into
What are the available alternatives to futures and the most effective hedging techniques
for portfolio optimization?
FC: While we strive to primarily use futures, structured forward products traded Over-The-Counter
(OTC) represent another important set of hedging instruments. We follow the traditional approach
of evaluating the available instruments by both their liquidity and correlation to the exposure
considered. In the past, margin requirements had been an important aspect of the considerations,
but they have become somewhat secondary in the last few years, given the low interest
environment. For commodity market exposure, we utilize mostly futures and OTC forwards. For
weather exposure, however, we do not use futures (e.g. CME’s heating degree day swaps). Instead,
we seek bilateral derivatives with certain counterparties, nowadays mostly insurance companies.
How can you effectively valuate your assets and mix them within your portfolio?
FC: When a new asset class is added to a portfolio, for example, a new structured product, we
initially evaluate its impact, from a theoretical standpoint, if possible. This is analyzed by seeking a
combination of simpler products that would be equivalent to the structured one. Secondly, we model
the asset or structured product in detail and run stochastic Monte-Carlo simulations to either
validate the theoretical approach or to take its place if such a combination is not found. With either
approach, we then incorporate the parameters of the asset into the position and our Value-at-Risk
(VaR) models and reports.
How do you offset your risks in today’s volatile market? Is hedging the only solution to
mitigate your risks and increase your revenue?
FC: The most significant risks in our business are related to market prices (commodity), weather
(volumetric), counterparty default, and regulatory. Hedging is the primary means to mitigate the
first two categories. For the other two, some of the risk is managed by contracting (e.g. by
establishing credit-related terms).
A huge and obvious topic right now is BP’s move to a swap dealer. Would you like to
comment on this topic?
FC: I do not have much to comment on this except for stating that I regard BP as a very important
market participant. They took a proactive stance from the beginning of the Dodd-Frank legislation
and have done a good job of anticipating and preparing for the changes. I expect other big energy
companies to follow their lead.
Mr. Cardozo has over seventeen years of experience in the energy industry from both the regulated
and deregulated markets, of which the last nine years have been in the natural gas industry. Mr.
Cardozo is Vice President of Supply & Risk Management for Gas South and is responsible for natural
gas procurement, asset and portfolio risk management, providing cost structures for pricing and
supply planning and forecasting. He has testified twice before the Georgia Public Service
Before joining Gas South in 2006, Mr. Cardozo worked as a Structuring Principal at Southern
Company. Before joining Southern Company in 2004, Mr. Cardozo was a Senior Analyst at Mirant
Corporation. Prior to this, he worked as a power transmission planning engineer for the National
Administration of Electricity (ANDE), the electric utility of Paraguay. Mr. Cardozo holds a bachelor’s
degree in Electrical Engineering from the National University of Asuncion, Paraguay, and earned a
Master of Science degree from Arizona State University as a Fulbright Scholar.
The GFMI Intelligent Hedging and Portfolio Optimization for the Energy Markets
Conference will take place in Houston, October 24-25, 2013. For more information, visit the event
website or please contact Tyler Kelch, Marketing Coordinator, Media & PR, GFMI at 312-894-6377 or
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