EU watchdog proposes emergency brake on energy markets

By Huw Jones

LONDON (Reuters) – A temporary brake on gas and power derivatives as prices rise could improve the overall functioning of the energy market, the European Union’s securities regulator suggested on Thursday.

The European Securities and Markets Authority (ESMA) said the number of trading disruptions in energy derivatives has been very low in recent weeks, even as regulations on circuit breakers are already in place and prices have soared after Russia’s invasion of Ukraine in February.

“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 so that they apply to all platforms trading energy derivatives, it said.

“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 effect, put up “margin” in the form of 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. But it rejected an industry suggestion that EU carbon credits could also be used, given their “high volatility and limited legal protections”.

She also had “concerns” about allowing unsecured guarantees from commercial banks as collateral, saying strict conditions must 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.

“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 Guardian said, referring to banks’ capital setting aside to cover risks of guaranteed going sour.

(Reporting by Huw Jones; Editing by Leslie Adler)

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