European authorities downplayed their ability to intervene in the region’s derivatives markets to help troubled energy companies after privately admitting that the volatility in energy prices was not due to “market failure”.
The European Commission said stress in markets such as electricity futures “appears to reflect acute uncertainty about market fundamentals” such as supply and demand, according to a presentation to diplomats on Wednesday seen by the Financial Times.
Stressing the lack of options, the European Securities and Markets Authority (ESMA) also recommended on Thursday that the Commission should look into ways to clarify existing standards on collateral to help ease demands on energy producers. However, officials raised doubts about the extent to which the collateral rules were extended.
The conclusions will come as a blow to EU capitals, which were looking for ways to intervene in European energy markets to deal with six months of volatility and rising prices. The cost of buying and selling gas, electricity and electricity has fluctuated wildly since the Russian invasion of Ukraine and has been exacerbated by water drought across the continent and the failure of about half of the French nuclear fleet, increasing costs. for families and businesses.
Last month Ursula von der Leyen, chairman of the commission, said the crisis has exposed the design limits of the European electricity market and needs a new market model that “really works and brings us back into balance”.
Wednesday’s presentation highlighted that the EU benchmark gas contract, called TTF, was based on market transactions, without third party judgments, and was also considered the benchmark for the global natural gas market.
Large utility companies that consume and produce large amounts of energy have especially felt the squeeze as they rely on futures markets to secure the price they will receive and ensure that electricity and electricity are supplied to millions of homes.
To open and hold their positions, they must make regular margin payments to clearing houses, utilities that are between two parties in a trade and prevent a default from infecting the rest of the market.
As prices have soared, the demands for utilities that have covered their energy sales, often months or years in advance, have increased to the point that few can afford to send more money, thus creating a liquidity crisis. Some countries, such as Sweden, Finland and Germany, have had to step in and provide credit guarantees to local utilities to help them overcome the crisis.
The presentation admitted that “the current level of margins in offset energy derivatives, as well as their necessity, is not questioned by market participants”.
An EU diplomat said that any intervention must be carried out with caution. “We don’t spread from energy markets to financial markets,” he said.
Esma was responding to a deadline on Thursday from the committee to review possible rule changes to allow for the use of more types of collateral for margin calls. The types of assets accepted by the clearing houses are dictated by the regulation.
The main clearing houses are operated by Nasdaq in Sweden, Ice Futures Europe in London and Amsterdam and EEX in Germany, which host the primary markets for electricity, gas and Brent crude oil respectively, and German energy futures.
Verena Ross, president of Esma, told the FT that the agency was seeking to clarify existing rules or provide more flexibility on eligible collateral such as EU sovereign bonds, bank guarantees or emission allowances. You said that you could only allow unsecured bank guarantees under strict conditions.
“We also need to make sure we don’t create risks in the system,” he said. “Clearing houses need high-quality collateral that they can deliver quickly,” she added.
The European Commission also asked Esma to investigate why the circuit breakers, which temporarily disrupt trading on the markets in times of volatility, did not activate during the energy crisis.
He also asked the agency if it was necessary to harmonize the standards that triggered the circuit breakers so that often interconnected markets, such as gas and electricity, would react in a unified way.