Exchange operator warns that energy traders will be charged additional margin paymentsEnergy traders would have to stump up an additional $33bn in margin payments if a plan by Brussels to cap the price of a key European gas benchmark goes ahead, a leading exchanges operator has warned.
Intercontinental Exchange informed the European Commission that producers and traders who rely on the Dutch TTF Futures Market will see their payments as insurance for securing their deals increase by 80 percent.
In a memo, ICE, Atlanta-based group which runs the TTF Market, warned that such a significant increase in margin requirements would “destabilise” the market. ICE declined comment.
According to the European Central Bank (ECB), margin requirements for energy producers on swaps and forwards have doubled in this year. This has forced many companies to use their credit lines and trade more privately where margin requirements are less.
ICE’s warning is coming as EU authorities rush to finalise a plan to cap the gas prices in the region. Prices soared during the summer, as Russia’s invasion into Ukraine and scorching heat curtailed economic output throughout the bloc, and forced EU Energy companies, to seek billions of euro in emergency funds.
The 27 EU members are trying to reach an agreement by the end the year. The commission proposed on Tuesday to limit the price for the upcoming TTF contract. TTF represents around four-fifths (45%) of the gas traded in the EU.
Brussels proposed capping gas prices if they reach EUR275 per megawatt-hour for two consecutive week and if there is a difference of EUR58 or more per MWh between the price and the benchmark for European Liquefied Natural Gas costs for at least 10 days during those weeks. The cap would have not been activated at those levels even though gas prices spiked this summer to unprecedented levels.
Diplomats in the 15 EU member states that have pushed for such a cap, fearing that another gas price spike this winter would cause social unrest and strain public finances, have indicated that their governments will oppose it on such a high scale.
ICE warns that any cap will mean that the upcoming contract will include more risks and private deals. This would force the exchange ask for more upfront money from customers. It said the risk was “instantaneous”.
The estimate of $33bn by the exchange covered both initial margins, which protect counterparties from default risk, and variation margins, which cover daily price fluctuations.
Energy producers and consumers use futures contracts to guarantee supply and price. A possible increase in margin requirements would put pressure on a market already in strain.
In September, Germany, along with other members states of the European Union, were required to provide liquidity support for energy companies that were struggling to meet collateral demands.
AFM, the Dutch regulator that oversees the TTF Futures Market, has warned as well that a limit could temporarily halt trading and force more deals be negotiated in private, away from exchange.
Experts at the commission say that the mechanism would be suspended in a single day if it was found to have a negative impact on financial stability, or if it caused an increase in gas consumption.
A senior EU official stated: “We know that there are consequences when you interfere in the derivatives market [and] have discussed these implications with experts.”
Person added that the mechanism is being “calibrated” to “respond to these risks”, but has “necessary protections”. . . “We need to be prepared to act quickly and decisively if something serious happens”.
The commission didn’t immediately respond to a comment request on the ICE Memo.