European authorities have downplayed their ability to intervene in the region’s derivatives markets to help struggling energy companies after privately admitting energy price volatility was not due to “market malfunction”.
The European Commission said stress in markets such as power 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.
The European Securities and Markets Authority (Esma) underscored the lack of options, also on Thursday recommending that the Commission look at ways to clarify existing collateral standards to ease requirements on energy producers. However, officials have expressed doubts about the extent to which collateral regulations could be expanded.
The conclusions will come as a blow to EU capitals, which had been looking for ways to intervene in Europe’s energy markets to cope with six months of volatile 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 droughts across the continent and the loss of about half of France’s nuclear fleet, driving down costs for homes and businesses raised.
Last month, Commission President Ursula von der Leyen said the crisis had exposed the limits of Europe’s electricity market design and needed a new market model that “really works and gets us back into balance”.
Wednesday’s presentation noted that the EU benchmark gas contract, dubbed TTF, is based on market transactions without third-party judgements, and is also seen as a benchmark for the global natural gas market.
Large utilities, which consume and produce large amounts of energy, have felt the squeeze particularly, as they rely on futures markets to guarantee the price they get and to ensure millions of homes are powered.
In order to open and hold their positions, they must make regular margin payments to clearing houses, the providers who sit between two parties to a trade and prevent a failure from infecting the rest of the market.
As prices have skyrocketed, demand for utilities who have hedged their electricity sales — often months or years in advance — has grown to the point where few can afford to invest more money, creating a liquidity crisis . Some countries like Sweden, Finland and Germany have had to step in and provide loan guarantees to local utilities to help them through the crisis.
The presentation acknowledged that “the current level of margins in cleared energy derivatives and the need for them is not questioned by market participants.”
An EU diplomat said any intervention must be done with caution. “Let’s not spill over from energy markets to financial markets,” they said.
Esma was responding to a Thursday deadline from the commission to consider possible rule changes to allow more types of collateral to be used for margin calls. The types of assets that are accepted by clearinghouses are determined by regulations.
The main clearing houses are operated by Nasdaq in Sweden, Ice Futures Europe in London and Amsterdam and Germany’s EEX, which house the primary markets for power, gas and Brent crude and German power futures respectively.
Verena Ross, chair of Esma, told the FT that the agency is seeking clarification of existing rules or more flexibility on eligible collateral such as EU government bonds, bank guarantees or carbon credits. Unsecured bank guarantees may only be allowed under strict conditions.
“We also have to make sure that we don’t create any risk in the system,” she said. “Clearing houses need high-quality collateral that they can liquidate quickly,” she added.
The European Commission has also asked Esma to investigate why circuit breakers that temporarily halt trading in the markets during volatile times were not triggered during the energy crisis.
She also asked the agency whether the standards that trip circuit breakers needed to be harmonized so that markets that are often linked, such as gas and electricity, would react in a unified way.
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