Home Commodities An EU gas price cap would hit the market by $33 billion, ICE says

An EU gas price cap would hit the market by $33 billion, ICE says

by SuperiorInvest

Energy traders would have to increase margin by another $33 billion if Brussels’ plan to cap the price of Europe’s key gas benchmark goes ahead, a leading exchange operator has warned.

Producers and traders who rely on the Dutch TTF futures market face an 80 percent increase in the payments they make as insurance to secure their trades, the Intercontinental Exchange told the European Commission, according to a report seen by the Financial Times.

Such a large increase in margin requirements could “destabilize the market,” ICE, the Atlanta-based group that runs the TTF market, said in a memo. ICE declined to comment.

Margin requirements for swaps and futures used by energy producers have already doubled this year, according to the European Central Bank, forcing many companies to draw lines of credit with their banks and do more trading privately, where margin requirements are lower.

ICE’s warning comes as EU authorities race to finalize a planned cap on gas prices in the region, which soared over the summer when Russia’s invasion of Ukraine and scorching temperatures hit supplies, curbing economic output across the bloc and forcing EU energy companies to seek billions of euros in emergency funds.

The 27 EU member states are trying to work out an agreement that could be implemented by the end of the year. On Tuesday, the Commission proposed to limit the price of the upcoming contract on the TTF market. TTF accounts for roughly four-fifths of gas deals in the bloc.

Brussels has proposed capping the gas price if it reaches €275 per megawatt hour for two consecutive weeks and if the difference between it and the benchmark for European liquefied natural gas costs is €58 per MWh or more for 10 days in those weeks. At those levels, the cap would not be lowered even if gas prices jumped to unprecedented levels this summer, leading critics to question the usefulness from curbs.

Diplomats from the 15 EU countries who pushed for the cap – fearing that another spike in gas prices this winter could spark social unrest and further strain public finances – have signaled their governments would oppose it at such a high level.

But ICE warned that any kind of restrictions would mean the upcoming contract would involve more risk and involve more private trades, prompting the exchange to ask customers for more money up front. The risk was “immediate”, he said.

The exchange’s estimate of $33 billion covered both initial margin, which protects counterparties from the risk of default, and variation margin, which covers fluctuating daily market prices.

A potential jump in margin requirements would hit a market that is already under pressure as energy trading companies struggle to find money to hedge their futures contracts, which are widely used by energy producers and consumers to secure supplies and guarantee the price they will receive.

In September, Germany and other member countries were forced to offer liquidity support to energy companies that were struggling with collateral requirements.

The AFM, the Dutch regulator that oversees the TTF futures market, also warned that the limit could temporarily halt trading and force more trades to be negotiated privately, off-exchange.

The mechanism would be suspended within a day if there was a risk that critical gas supplies would be sent elsewhere, affect financial stability or trigger a surge in consumption, according to commission experts.

“We recognize that when you intervene in the derivatives market, there are consequences [and] we have discussed these implications with experts,” said a senior EU official.

The person added that the mechanism was “calibrated to respond to these risks” but also had “necessary safeguards. . . to ensure that if something serious happens, we have everything we need to respond quickly.”

The commission did not immediately respond to a request for comment on the ICE memo.

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