Exclusive-EU watchdog considers collateral changes to ease energy crunch

By Huw Jones

LONDON (Reuters) -The European Union's securities watchdog said on Monday it was considering a rare move to relieve energy companies struggling to find enough cash to cover their positions.

The EU and Britain are battling to mitigate the shock of what some politicians have dubbed an "energy war" with Russia, which has slashed gas exports to Europe after the West imposed sanctions over its invasion of Ukraine.

The EU's executive European Commission is due on Wednesday to unveil a package of measures to help power firms facing a liquidity crunch.

Utilities often sell power in advance but must maintain a minimum "margin" or cash deposit in case of default before supplying the power.

The amount of such collateral required has raced higher in tandem with surging energy prices.

"We see the strain for certain market participants and are actively considering whether, besides such supervisory monitoring, any regulatory measures are necessary," a spokesperson for the European Securities and Markets Authority (ESMA) said.

"This includes the points of collateral and circuit breakers, amongst others."

ESMA directly regulates clearing houses in the EU, who in turn set mandatory levels of margin based on potential risks from markets and counterparties.

Public intervention in this area is rare, especially after the global financial crisis over a decade ago led to tougher margin requirements.

The need to roughly double the London Metal Exchange's clearing default fund earlier this year when nickel prices rocketed after Russia's invasion of Ukraine, was a reminder of the need to avoid weakening clearers.

Some industry officials are hoping that non-cash forms of collateral could be used, such as "fully committed on demand" bank guarantees or letters of credit, which are widely used in the United States in physical energy markets.

A clearing industry official said any easing of margining rules should only be for non-financial energy market firms because the chances of energy and banking sectors being in trouble at the same time were low according to historic data.

Another alternative to using cash is to allow energy companies to post EU emission allowances as margin, the official added.

Allowing their use or other changes in collateral would mean having to ease the bloc's "EMIR" derivatives rules and guidance from regulators.

Circuit breakers refer to temporary halts in trading following an unusually large price move.

"Any regulatory measures in the financial markets need to take due account of the importance to maintain financial stability in the market, including of market infrastructure and market participants," ESMA said.

"Therefore any measures need to be carefully evaluated and considered, to ensure they bring the benefits without increasing financial stability risks in the system."

Last week the Bank of England and finance ministry announced a planned 40 billion pound ($46.7 billion) Energy Markets Financing Scheme to help market participants deal with liquidity crunches.

On Monday, the BoE, which regulates clearing houses in Britain, declined to comment on whether it was looking at any specific measures on collateral.

($1 = 0.8570 pounds)

(Reporting by Huw Jones; Editing by Susan Fenton, Emelia Sithole-Matarise, Alexander Smith and Tomasz Janowski)