EU watchdog proposes emergency brake for energy markets

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LONDON — A temporary brake on gas and power derivatives when prices rise could help energy markets work, the European Union’s securities regulator suggested on Thursday, along with more fundamental changes over time.

The European Securities and Markets Authority (ESMA) said the number of trading disruptions in energy derivatives has been very low in recent weeks, despite circuit-breaker regulations already in place and prices soaring after Russia’s invasion of Ukraine in February.

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“It therefore seems reasonable to consider the implementation of a new type of trading suspension mechanism on a temporary basis and only for energy derivatives markets,” ESMA said in a statement.

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The parameters of such a mechanism should be set at EU level to apply to all platforms trading energy derivatives, it said – a move that would override exchanges.

“We would envisage these mechanisms only triggering stops for a limited period of time and in exceptional circumstances, such as in the case of extreme spikes in volatility, which can lead to disorderly trading conditions,” ESMA said.

Such a mechanism would need to be implemented as part of emergency measures to deal with the current energy crisis, she added.

ESMA was responding to a call for “concrete plans” from the EU executive, the European Commission, to address problems raised in energy markets by high prices forcing governments to offer aid to energy companies.

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Energy companies sell their production through derivatives markets, requiring them to in practice deposit “margin” cash to cover positions with clearinghouses in case they go sour.

ESMA said on Thursday it could formally clarify that commercial paper and EU government bonds are already considered collateral. However, she rejected an industry suggestion that EU carbon emission allowances could also be used, given their “high volatility and limited legal protection”.

It also had concerns about allowing unsecured guarantees from commercial banks as collateral, saying strict conditions needed to apply.

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ESMA said such conditions include a time limit on their use, for example for the winter period when tensions in energy markets are expected to persist.

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“ESMA believes that prudential requirements should continue to underpin such risks and limit banks’ concentration risk, which would then impact the practical use of this type of collateral,” the watchdog said, referring to banks’ capital provision to cover risk guaranteed to get mad.

Clearinghouses should also set limits to ensure that a bank guarantee represents only a “small fraction” of the total initial margin requirement.

Such safeguards are welcomed by banking regulators across the bloc, concerned about relaxing capital rules.

A leading European banking regulator said lenders should not be encouraged to provide guarantees that are not commercially priced and backed by adequate capital.

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EU nations are holding a summit next week to decide on emergency measures to support energy companies.


ESMA signaled that regulators need to get a much broader grip on commodities markets to include not just exchanges but also over-the-counter or over-the-counter trading and transactions in the physical market.

It is “crucial” that national regulators in EU countries have increased the visibility of OTC trades that cover the same market as those traded on exchanges, ESMA said.

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In addition, physically settled gas and power products should be required to meet at least minimum transaction and daily position reporting requirements to increase transparency, it said.

Regulatory exemptions for large non-financial firms that can trade commodity derivatives should be scrapped, requiring them to have an investment firm license, ESMA said.

“This would ensure that such significant entities active in the commodity derivatives markets and doing essentially the same business as investment firms would be subject to the strict requirements of financial regulation,” ESMA said. (Additional reporting by Francesco Canepa in Frankfurt; Editing by Leslie Adler and Lisa Shumaker)


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