WESM’s plans for derivatives market skids on legal hurdle

Published December 28, 2017, 10:00 PM By Myrna M. Velasco

https://business.mb.com.ph/2017/12/28/wesms-plans-for-derivatives-market-skids-on-legal-hurdle/

The plan of the Wholesale Electricity Spot Market (WESM) to introduce “derivatives market” into its array of services is skidding into a legal hurdle that considers such market option “a form of gambling.”

Nevertheless, according to lawyer Francis Saturnino Juan, chief operating officer of the Philippine Electricity Market Corporation’s (PEMC) transition committee, they still want this thoroughly studied with the help of their consultant from the Nord Pool AS, operator of one of Europe’s largest electricity market pool.

“The derivatives market is still under study. But along with that, we shall also consider the Supreme Court’s ruling on the ‘Onapal case’, which opines that ‘futures contract’ treads into gambling,” he explained.

In the 1993 Onapal case, the court cited jurisprudence in England and the United States “where contract commonly called ‘futures originated,’ such contracts were at first held valid and could be enforced by resort to courts,” but later on, it was stipulated that “these contracts were held invalid for being speculative, and in some states in America, it was unlawful to make contracts commonly called ‘futures’.”

The high court ruling further states that “such contracts were found to be mere gambling or wagering agreements covered and protected by the rules and regulations of exchange in which they were transacted under devices which rendered it impossible for the courts to discover their true character.”

PEMC announced in March 2017 the start of its “derivatives market study,” which it indicated will be phased-in according to the planned introduction of new service offers into the power spot market.

It qualified that “experiences in various jurisdictions suggest that electricity derivatives help in the management of risks due to price movements in the spot market through structured hedging strategies.”

Hedging takes the form of an investment that can reduce the risk of adverse price movements associated with an asset – and this can be exercised by taking an offsetting position via a related security, such as “futures contract.”