Europe’s multi-trillion euro energy derivatives market is under scrutiny

European financial authorities are stepping up scrutiny of energy derivatives transactions used by energy companies to hedge electricity and gas prices as policymakers seek to avoid a ripple effect of the energy crisis on financial markets. In the multi-trillion-euro energy derivatives market, energy companies faced more than a trillion euros in margin calls in September, a development that could have triggered a meltdown proportions of “Lehman Brothers” in the energy sector.

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

Today the main financial authority in the Eurozone, the European Central Bank (ECB), launched an investigation into the energy derivatives market to determine whether energy hedging and betting could present a risk to the financial system within the meaning broad and financial stability, according to sources familiar with the matter told Reuters this week.

This rare scrutiny of a hitherto largely unregulated trade highlights efforts by European authorities not to let the energy crisis drag down the financial system with it.

The ECB’s scrutiny was triggered by the collapse of German energy giant Uniper, two Reuters sources say.

Uniper was nationalized earlier this year as the German government sought to prevent a collapse of German energy and gas suppliers. After Germany scrapped plans to introduce a gas tax for all consumers, which would have been paid to energy companies, the government may have to spend another $10.2bn (€10bn) to $40.8 billion (40 billion euros) in connection with the provision of liquidity to the largest importer of natural gas, German business daily Handelsblatt reported last month, citing financial and government sources. Related: Why U.S. Diesel Exports Didn’t Dry Up During a Domestic Shortage

Earlier this year, European energy companies faced margin calls totaling $1.5 trillion in the derivatives market, and many would need political support to hedge them amid wild swings and soaring gas and electricity prices, said Helge Haugane, senior vice president at Equinor. for gas and electricity, to Bloomberg in early September.

Finland and Sweden have plans in place to support their energy companies trading in power derivatives markets, seeking to avoid a “Lehman Brothers” event in their respective energy industries and financial systems.

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

ECB President Christine Lagarde said in September that the bank would not give short-term financing to European energy companies struggling with the energy crisis, exorbitant prices and margin calls on derivatives markets.

“As far as the ECB and the national central banks of the Eurosystem are concerned, we are of course ready to provide liquidity to the banks, not to the energy service companies,” Lagarde said.

Although direct financing of energy companies has been ruled out, scrutiny of the energy derivatives market has increased in recent months.

Last month, the European Commission offers new measures to alleviate the liquidity problems that many energy companies currently face in meeting their margin requirements when using derivatives markets. The Commission is raising the compensation threshold from $3.01 billion (€3 billion) to $4.01 billion (€4 billion). Below this threshold, non-financial companies will not be subject to margin requirements on their OTC (over-the-counter) derivatives. The EC has also temporarily expanded the list of eligible collateral to non-cash collateral, including government guarantees.

“These two measures will provide much-needed relief to businesses, while maintaining financial stability,” the Commission said.

In addition, the European Agency for the Cooperation of Energy Regulators (ACER) and the European Securities and Markets Authority (ESMA) have also established in October, a new joint working group, “to strengthen their capabilities to monitor and detect possible market manipulation and abuse in the European energy spot and derivatives markets, as a precautionary measure to protect the stability of the market”.

By Tsvetana Paraskova for Oilprice.com

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