Large commodity consumers typically contract their supplies directly at the source. They enter into bilateral agreements with producers. Large producers and consumers transact in bulk. Bespoke terms and conditions may apply to the supply contracts they enter into. These arrangements may be for the long-term, although a short period of time is also possible. Long-term structured deals for super large volume could even involve governments, either directly or indirectly. Not all bilateral deals are bespoke, structured and complex; some transactions concern standard agreements. Straight forward contracts may be less sexy, but allow for swift action. This is especially suitable as not all deal-making is between producers and consumers. In the commodity and energy wholesale markets parties with a trading function transact with their peers on an ongoing basis. This includes traders at oil and gas companies, utilities, commodity trading firms and banks.
Basically, transactions are either concluded at a trading venue (like an exchange) or in the over-the-counter (OTC) market. Bilateral deal-making takes place in so-called OTC markets. Exchange-trading and bilateral deal-making differ in quite some respects. Above all, exchange-trading involves standardisation. First of all, transactions concluded at an exchange are subject to the rules and regulations of the relevant venue. The trading venue develops and maintains a rulebook; all its members have to comply with the included provisions. Secondly, the exchange standardises products by defining the specifications, after which they are admitted for trading (listing). Thirdly, an exchange does not discriminate amongst its members; all are treated the same way, irrespective of a member’s solvency, creditworthiness or reputation. On the contrary, deal-making in a bilateral manner involves discrimination. In addition, tailoring of contracts is required, leading to differentiation. Every transaction in the OTC market concerns a bilateral deal between two parties, whereby these players must agree on the applicable terms. That is why OTC trading involves bespoke arrangements, or structuring. In practice, however, market participants prefer to standardise terms and conditions as much as possible, also with bilateral deal-making, especially when transacting with a particular counterparty is common and takes place frequently. In such a case, a standard legal framework would be of help. Moreover, a central role is provided to this form of standardised documentation or, in trading terminology, ‘master agreement’.