Europe’s Multi-Trillion-Euro Energy Derivatives Market Is Under Scrutiny

Europe’s financial authorities are strengthening the oversight of the energy derivative trades used by energy firms to hedge power and gas prices as policymakers look to avoid a spillover effect of the energy crisis into financial markets. In the energy derivative market, worth trillions of euros, energy firms faced more than a trillion euros in margin calls in September, a development that could have triggered a collapse of “Lehman Brothers” proportions in the energy industry.

As the energy crisis deepened this autumn, the European Commission proposed new regulations for the energy derivatives markets to provide much-needed relief for companies, while also maintaining financial stability.

Now the Eurozone’s primary financial authority, the European Central Bank (ECB), has launched an inquiry into the energy derivatives market to see whether the energy hedges and bets could pose a risk to the broader financial system and financial stability, sources with knowledge of the matter told Reuters this week.

This rare scrutiny into a so-far largely unregulated trading highlights the European authorities’ efforts to not let the energy crisis drag down the financial system with it. The ECB scrutiny was triggered by the collapse of Germany’s energy giant Uniper, according to two Reuters sources.

Uniper was nationalized earlier this year as the German government sought to prevent a collapse of the German energy and gas suppliers. After Germany scrapped an idea to introduce a gas levy to all consumers, which would have gone to energy companies, the government may have to splash another $10.2 billion (10 billion euros) to $40.8 billion (40 billion euros) in liquidity assistance to the biggest natural gas importer, German business daily Handelsblatt reported last month, quoting financial and government sources.

Earlier this year, European energy companies were facing margin calls totaling $1.5 trillion in the derivatives market, and many would need policy support to cover them amid wild swings and skyrocketing gas and power prices, Helge Haugane, Equinor’s senior vice president for gas and power, told Bloomberg in early September.

Finland and Sweden have put out plans to support their energy companies trading in the electricity derivatives markets, looking to avoid a “Lehman Brothers” event in their respective energy industries and financial systems.

“This has had the ingredients for a kind of a Lehman Brothers of energy industry,” Finland’s Minister of Economic Affairs, Mika Lintila, has said, as carried by Reuters.

ECB President Christine Lagarde said in September that the bank would not give short-term financing to European energy firms struggling through the energy crisis, sky-high prices, and margin calls on the derivatives markets. “As far as the ECB is concerned, and the national central banks of the Eurosystem, of course we stand ready to provide liquidity to banks, not to energy utility firms,” Lagarde said. Although direct financing to energy firms has been ruled out, scrutiny of the energy derivatives market has increased in recent months.

Last month, the European Commission proposed new measures to ease the liquidity issues many energy companies currently face in meeting their margin requirements when using derivative markets. The Commission is increasing the clearing threshold from $3.01 billion (3 billion euros) to $4.01 billion (4 billion euros). Below this threshold, non-financial firms will not be subject to margin requirements on their OTC (over-the-counter) derivatives. The EC also temporarily expanded the list of eligible collateral to non-cash collaterals, including government guarantees.

“Both these measures will provide much needed relief for companies, while also maintaining financial stability,” the Commission said.

In addition, the EU Agency for the Cooperation of Energy Regulators (ACER) and the European Securities and Markets Authority (ESMA) also created in October a new joint Task Force, “to strengthen their capabilities to monitor and detect possible market manipulation and abuse in Europe’s spot and derivative energy markets, as a precautionary measure to protect the stability of the market.”

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