EU watchdog proposes emergency brake for energy markets

EU watchdog proposes emergency brake for energy markets

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  • ESMA wants more control over energy markets
  • Overwatch flags need more drastic changes
  • Increase transparency in OTC and physical markets

LONDON, Sept 22 (Reuters) – A temporary curb on gas and power derivatives when prices spike could improve the functioning of energy markets, the Union securities watchdog proposed on Thursday. European Union, as well as more fundamental changes over time.

The European Securities and Markets Authority (ESMA) says the number of trading stops in energy derivatives has been very low in recent weeks despite circuit breaker rules already in place and prices rising after the invasion of Ukraine by Russia in February.

“It would therefore seem useful to consider implementing, on a temporary basis and for energy derivatives markets only, a new type of trading stop mechanism,” ESMA said in a statement.

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The parameters of such a mechanism would need to be set at EU level to apply to all platforms that trade in energy derivatives, he said – a step that would nullify trading.

“We would consider these mechanisms triggering stops for a limited period of time only and in exceptional circumstances, for example, in the event of extreme spikes in volatility which may lead to disorderly trading conditions,” ESMA said.

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

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

Energy companies sell their output using derivatives markets, requiring them to deposit “margin” in the form of cash, in effect, to cover positions in clearing houses in case they go sour. Read more

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

He was also concerned about making unsecured commercial bank guarantees eligible for use as collateral, and said strict conditions should apply.

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

“ESMA believes that prudential requirements should continue to underpin these exposures and limit banks’ concentration risk, which would then impact the practical use of this type of collateral,” the body said. oversight, referring to banks setting aside capital to cover risk. guarantees that turn sour.

Clearinghouses should also set a limit to ensure that a bank guarantee represents only a “small share” of the total initial margin requirements.

Such guarantees will be welcomed by banking regulators in the bloc, worried about a relaxation of capital rules.

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

EU states are holding a summit next week to decide on emergency measures to help energy companies.


ESMA has signaled the need for regulators to have a much broader grip on commodity markets to include not only exchanges, but also over-the-counter or off-exchange trading, and physical market trading. .

It was “crucial” for national supervisors in EU states to have increased visibility into OTC transactions that cover the same market as those traded on exchanges, ESMA said.

In addition, physically settled gas and electricity products should at least comply with minimum transaction and daily position reporting requirements to increase transparency, he said.

Regulatory waivers for large non-financial firms that can trade commodity derivatives should be removed so that they require an investment firm license, ESMA said.

“This would ensure that those significant entities active in commodity derivatives markets carrying out essentially the same activities as investment firms would be subject to the strict requirements set out in financial regulation,” ESMA said.

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Additional reporting by Francesco Canepa in Frankfurt; Editing by Leslie Adler and Lisa Shumaker

Our standards: The Thomson Reuters Trust Principles.

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