The European Commission aims to introduce a raft of regulatory changes to alleviate the liquidity squeeze in the energy sector, as the bloc ramps up support to industries and consumers affected by Russia’s throttling of gas supplies.
(Bloomberg) — The European Commission aims to introduce a raft of regulatory changes to alleviate the liquidity squeeze in the energy sector, as the bloc ramps up support to industries and consumers affected by Russia’s throttling of gas supplies.
Measures proposed by the commission include raising the clearing threshold for commodities and other derivatives to 4 billion euros ($4 billion) and allowing bank guarantees to be accepted as collateral against margin calls, according to a policy document.
The European Securities and Markets Authority has until September 22 to respond to the proposals, the document states. ESMA said Tuesday it was considering measures, including circuit-breakers, to limit stress in the energy market.
Read More: European Watchdog Mulls Circuit-Breakers to Calm Energy Markets
European countries have already committed billions in emergency loans to utilities stung by calls to post collateral against their derivatives positions. That’s stemming the impact to consumers and banks of defaults in the sector after prices for gas and power spiked last week on news Russia’s Nordstream 1 gas pipeline will remain closed indefinitely.
Utilities tend to hold majority short hedging positions against the physical contracts they have for buying wholesale gas and power. This means they are vulnerable to losses if prices rise sharply.
When this happens, a company’s broker, bank or exchange will request cash to act as collateral against the position, the amounts of which can soar dramatically if prices move as they did last Monday, rising as much as 35%.
Most of the Commission’s proposals were already under discussion in policy circles. Utilities and energy industry groups have been lobbying for changes to derivatives trading regulation since the start of Russia’s invasion of Ukraine. The bloc is also proposing a mandatory cut on energy use and windfall taxes on utility-company profits, parts of a package of radical measures to deal with the gas crisis that is yet to be signed off on by member states.
Read More: EU Eyes Rationing, Moves to Aid Collateral Crunch: Energy Update
Meanwhile ESMA said in June that it would consider raising its threshold, which currently requires companies with revenues of over €3 billion to trade all their derivatives deals through a clearing exchange. Clearing houses, which exist in part to protect against defaults in derivatives markets, require firms to put up substantial amounts of collateral to place trades.
(Adds impact of bailouts in fourth paragraph, adds context from fifth paragraph)
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