Derivative regulation and its impact on energy and utility firms

Gas and electricity companies could be negatively affected by the introduction of Dodd-Frank (DF) Act in the USA and the EMIR regulation in Europe. The analysis and critical examination of the theoretical and empirical literature demonstrate that indeed hedging costs increase when transactions are subject to mandatory margining. If these costs are the only important variable in judging the efficiency of this regulation then, justifiably, its introduction is not Pareto improving. But the main objective of the derivative regulation is the control of systemic risk and the recent studies neglect to take these potential benefits into consideration. It is only when both costs and benefits are equally weighted that the desirability of the derivative regulation.