Energy derivatives
Energy derivatives

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Energy derivatives
  • What are energy derivatives?
  • Common types of energy derivatives
  • Uses and users of energy derivatives
  • Regulation of energy derivatives
  • Exchange traded energy derivatives
  • Over-the-counter derivatives documentation

BREXIT: The UK is leaving the EU on Exit Day (as defined in the European Union (Withdrawal) Act 2018). This has an impact on this Practice Note. For guidance, see Practice Note: Brexit—impact on finance transactions—Key issues for derivatives transactions and Brexit—impact on finance transactions—Derivatives and debt capital markets transactions—key SIs.

What are energy derivatives?

Energy derivatives reference the underlying price of an energy source, such as oil, gas or electricity. They can be traded over-the-counter (OTC) or on an exchange. Participants in the energy derivatives markets include:

  1. brokers

  2. financial institutions

  3. investment funds

  4. speculators, and

  5. direct energy users

Common types of energy derivatives

Forwards/futures

A forward contract in the energy markets is an OTC derivative contract that provides for the future delivery of an energy product, but with the price of that delivery agreed on the date of the contract. A futures contract is broadly similar but is purchased on an exchange rather than privately negotiated with a market counterparty. See Practice Note: Types of derivatives for more information on these products.

Swaps and contracts for differences

A swap contract in the energy markets is usually cash settled—they are frequently entered into with financial institutions. A user of a commodity such as oil that wants to protect itself against rising prices may agree to pay a fixed price