Hedging has long been an intrinsic part of the energy and
commodities sector. In its simplest form, hedging is a tool used to
mitigate price risk by taking an equal and opposite position
between the physical product hedged and the underlying market used
as the hedging instrument. However, that is generally where the
simplicity ends. Recently, both industry regulators and the courts
have been required to grapple with complex issues around hedging,
as well as with less common breach of contract cases.
Taking the regulatory issues first, as a result of requirements
imposed by MiFID II and Regulation 149/2013 (the European Market
Infrastructure Regulation or EMIR)1, firms are now
putting in place hedging policies which determine when a trade is
for the purpose of hedging price risk in physical products, and
when it is for speculative purposes. These policies permit a range
of hedging strategies (including anticipatory hedging, proxy
hedging, macro hedging and portfolio
