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EU outlines energy trading fixes to counter crunch

·3-min read
FILE PHOTO: European Union flags flutter outside the EU Commission headquarters in Brussels

By Huw Jones and Marwa Rashad

LONDON (Reuters) -The European Union's securities watchdog will set out temporary market fixes by Sept. 22 to ease a liquidity crunch faced by energy firms, the bloc's executive body said on Wednesday, as the prospect of winter fuel rationing, company insolvencies and recession loomed.

Earlier, the European Commission said it would raise more than 140 billion euros ($140 billion) to cope with an energy crisis that has left both households and utilities struggling with a liquidity crunch.

Energy companies in particular face solvency issues due to the rising amount of "margin", or cash they must post at clearing houses, in case of default on their futures sales contracts.

Energy prices have rocketed since Russia's invasion of Ukraine in February, meaning more cash is needed to cover positions.

The Commission said on Wednesday it has asked the bloc's European Securities and Markets Authority (ESMA) to consider and present appropriate amendments to broaden the list of eligible collateral beyond cash, and the conditions under which bank guarantees could be accepted.

"ESMA is invited to report back with concrete proposals by 22 September," the Commission said in a statement.

The collateral measures would be temporary and apply only to gas and electricity derivatives, the commission said.

The European Banking Authority and the European Central Bank will also assess how banks currently provide collateral services, with EBA reporting back by Sept. 29.

ESMA and EBA will look at how to make posting margin more predictable for energy firms, such as by meeting intraday calls when prices change, the commission said.

ESMA will assess whether the contract value threshold for clearing commodities should be raised to 4 billion euros to reflect higher market prices.

The EU executive said ESMA will also investigate why circuit breakers or temporary halts in trading were not triggered when energy prices raced higher, and whether the rules need harmonising across the bloc.

"This is to ensure that all electricity exchanges take a coherent line when confronted with excessive gas price volatility," the commission said, adding that ESMA is due to set out concrete proposals by Sept. 29.

The EU markets watchdog will set out proposals by Oct. 17 on a more harmonised approach at exchanges to manage excessive price movements to help dampen volatility and slow down intraday margin calls.

LNG-LINKED BENCHMARK

The Commission said it was working on a complementary transactions-based price benchmark that should reflect gas imports more accurately.

A reliable benchmark that better represents market conditions should cover LNG tanker deliveries to regasification terminals in the EU, while an alternative benchmark for imported gas should eventually reduce reliance on future markets - where gas is paid for at entry points - as the main reference price for gas imports, it said.

Historically, the European gas price at the Dutch Title Transfer Facility (TTF) hub was regarded as a sufficient proxy for delivered LNG into Europe, with the differential between these prices being a small spread, often matching the costs to regasify the gas and send it into the grid.

Industry sources said that the market needs to have a price that is reflective of the actual supply and demand and to reduce exposure to the TTF, which is currently very volatile and is the most expensive.

"The aim is not to phase out futures markets for 'entry-paid' gas but to provide market participants with an alternative reference price that reflects the supply and demand dynamics of international gas markets," the commission said.

The LNG cargoes on a delivered ex-ship (DES) basis arrive to several gas markets inside Europe. The most notable of these is Northwest Europe which include the UK, the Netherlands, Belgium and Atlantic France, and Southwest Europe including Spain, Portugal and Italy, among others.

While France, Britain, Spain have much higher LNG receiving capacity, Germany has none and the Netherlands have insufficient capacity , creating price differences between these countries. different import capacities and different interconnections between gas hubs also prompt price divergence.

(Additional reporting by Isla Binnie in MadridEditing by Tomasz Janowski and Bernadette Baum)