Collateral

Exclusive: EU watchdog eyes collateral changes to ease energy crisis

European Union flags fly in front of the European Commission headquarters in Brussels, Belgium, June 17, 2022. REUTERS/Yves Herman

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LONDON, Sept 12 (Reuters) – The European Union’s securities watchdog said on Monday it was considering a rare measure to relieve energy companies struggling to find enough cash to cover their positions.

The EU and Britain are battling to soften the blow of what some politicians have called an ‘energy war’ with Russia, which cut gas exports to Europe after the West imposed sanctions for its invasion of Ukraine.

The EU’s executive European Commission is due to unveil a set of measures on Wednesday to help energy companies facing a cash crunch. Read more

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Utilities often sell electricity in advance, but must maintain a minimum “margin” or cash deposit in the event of a default before supplying the electricity.

The amount of these guarantees required has increased in parallel with the surge in energy prices.

“We see the pressure on some market participants and are actively examining whether, in addition to this prudential supervision, regulatory measures are necessary,” said a spokesperson for the European Securities and Markets Authority (ESMA).

“This includes warranty points and circuit breakers, among others.”

ESMA directly regulates clearing houses in the EU, which in turn set required margin levels based on potential market and counterparty risks.

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

The need to roughly double the London Metal Exchange’s default clearing fund earlier this year when nickel prices soared after Russia’s invasion of Ukraine underscored the need to avoid to weaken the clearers.

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

A clearing industry official said any relaxation of margin rules should only affect non-financial companies in the energy market, as the risks of the energy and banking sectors struggling at the same time were low according to historical data.

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

Allowing their use or other changes to collateral would mean having to relax the bloc’s EMIR derivatives rules and regulators’ guidelines.

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

“Any regulatory measure in financial markets should take due account of the importance of maintaining financial stability in the market, including market infrastructures and market participants,” ESMA said.

“Therefore, all measures should be carefully assessed and reviewed, to ensure that they bring benefits without increasing financial stability risks in the system.”

Last week, the Bank of England and the Department of Finance announced a £40bn ($46.7bn) energy markets funding package to help market players deal with shortages of cash. Read more

On Monday, the BoE, which regulates clearing houses in Britain, declined to say whether it was considering specific action on collateral.

($1 = 0.8570 pounds)

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

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