On Tuesday 18 October the European Commission adopted two measures concerning energy derivatives on the financial markets, Commission President Ursula von der Leyen and the Commissioners for Energy and Financial Services, Kadri Simson and Mairead McGuinness, announced at a press conference. These two delegated acts “are focusing on easing the liquidity stress that some energy companies have faced in meeting their margin requirements, and on tackling the extreme price volatility on energy derivative markets”, Ms Guinness explained. She said they are “both targeted and time-limited”.
They are part of a new package of measures to tackle high energy prices and ensure security of supply (see other article).
Following the advice of the European Securities and Markets Authority (ESMA) (see EUROPE 13044/20), the Commission has decided to increase the commodity clearing threshold from €3 billion to €4 billion. This will allow energy companies to engage in more over-the-counter transactions without being subject to margin requirements.
Ms McGuinness said that “below this threshold, firms using over-the-counter derivatives will not have to provide margins for the bilateral trades”.
This threshold, which is part of the European Market Infrastructure Regulation (EMIR), had not been revised since 2013.
The second measure will temporarily expand the list of eligible assets that can be used as collateral to meet margin calls. Public guarantees and uncollateralised bank guarantees can therefore be used, subject to certain conditions. ESMA has published guidance that clarifies the eligibility of other assets, such as commercial paper or EU bonds.
Under normal circumstances, most energy derivatives trading takes place on regulated markets and is centrally cleared by central clearing counterparties (CCPs). In these markets, the current regulatory framework provides the necessary safeguards to ensure financial stability, such as margin requirements for clearing between buyers and sellers: if one party defaults, the other market participants are protected from this risk.
However, due to the sharp rise in gas and electricity prices, energy companies have had to provide higher amounts of cash collateral to CCPs as margin calls have increased in line with prices. This has led to liquidity problems for companies in the energy sector.
To provide urgent relief to these non-financial counterparties, ESMA considered it important to expand the list of eligible collateral at EU CCPs as soon as possible.
This measure is due to expire 12 months after its entry into force, but the Commission is ready to ask ESMA to consider an extension of these measures depending on how the situation develops.
In addition, ESMA announced that it is strengthening its cooperation with the Agency for the Cooperation of Energy Regulators (ACER), which helps to ensure the smooth functioning of the European gas and electricity market. Their aim is “to further improve information exchange and avoid potential market abuse in Europe’s spot and derivative markets”, according to the statement.
While building on existing cooperation tools, ACER and ESMA are setting up a joint task force to improve coordination on data and knowledge exchange between their staff and respective national authorities. (Original version in French by Anne Damiani)