This year’s extreme market volatility and its impact on energy markets came under the spotlight on a panel discussion about clearinghouse risk at FIA Expo on 14 November.
Panelists discussed recent measures in Europe to ease the pressure of sky-high collateral requirements on energy market participants, as well as proposals to amend derivatives clearing rules for energy markets put forward by the European Commission
“If you look at the energy crisis, we have seen uncharted price increases by up to 10 times in some areas, which has resulted in corresponding volatility,” said Klaus Löber, chair of the European Securities and Markets Authority’s CCP Supervisory Committee. “What we are witnessing is a trend from exchange-traded to OTC, and in some instances the non-financial sector stopping their hedging activities. These trends have clear issues with transparency and the stability of prices offered to consumers, and we have been reflecting hard in Europe on how to respond.”
Löber said ESMA has been working to expand the pool of eligible collateral available to “non-financial counterparties” struggling to find enough cash to meet margin calls, to include uncollateralized bank guarantees and public sector guarantees.
“ESMA has also proposed to look at enhancements for circuit breakers, but there is now a much wider range of issues being floated in a paper presented by the European Commission,” he said. “Let me be clear, these are currently still at a discussion level. I very much hope and expect that some of the measures in there will be subject to a thorough discussion as to their potential implications.”
The European Commission’s discussion paper presented on 8 November to EU member state officials suggests changes to the EU’s clearing rules to “separate the risks of commodity markets from other financial risks”, among other objectives. Proposals include segregating the margin of energy firms, separating clearinghouse default funds for energy products, and restricting energy firms from acting as direct members of clearinghouses.
“On the issue of default funds, that's something which clearly may merit some reflection,” Löber said. “This is not novel and some CCPs actually operate under such models, but that is something as part of the discussion that is probably worth taking a look.”
Price caps
Other proposals under discussion on the panel included the EU’s proposed cap on gas prices, which Kevin McClear, president, ICE Clear US, described as being one of the most concerning discussions taking place in Europe.
“We can understand the concern to try and protect consumers from high energy prices coming out of the Russian war in Ukraine, but fundamentally price caps do not work for the exchange model or the cleared model,” he said.
“Our markets depend on the natural balance between supply and demand. When you impose artificial price limits, you disrupt that basic economic function, and it puts a clearinghouse in an untenable position. How do you mark your market to the market if you have artificial price limits? How do you manage your margin models? How do you determine the prices that go into your dynamic margin models? And then what about in the event of a default? How do you manage a default?” he said.
“There are a lot of issues coming out of the discussion around price caps and we have been discussing with policymakers the damage that price caps can do to a market economy.”
Suzanne Sprague, senior managing director, global head of clearing and post-trade services, at CME Group agreed with McClear on the issue of price caps, which could potentially see a shift of trading activity from exchanges to the more opaque OTC market.
“The purpose of central clearing and central limit order books is price discovery. If you start interfering and putting controls in place with that process, you disrupt the incentives that should be in place for essentially cleared markets,” Sprague said.
