The energy crisis, the sustainability agenda and the European Commission’s focus on shifting euro clearing from London to the continent topped the agenda at FIA Forum Brussels on 20 September, where regulators and market participants gathered to discuss the pressing issues affecting the cleared derivatives markets.
The event, organised by FIA, took place during an unprecedented month in the European derivatives markets, with record-high energy prices, power companies facing extraordinarily large margin calls from clearinghouses against future deliveries of gas and power, and regulators weighing possible intervention in the region’s energy markets.
Offering their perspectives on events, a panel of leading market participants stressed that current energy price volatility was not due to market malfunctioning but rather reflected uncertainty about market fundamentals such as supply and demand.
“We don't have a market crisis, we have a supply crisis. And the only way you can solve the supply crisis is either radically reducing demand, which is not what we want, or providing additional supply,” said Peter Reitz, CEO, European Energy Exchange, one of the largest energy exchanges in Europe.
“That has to include all the elements [such as coal and other fossil fuels], at least in the short term. In the longer term, however, we need to expand renewable energies, which will help to solve both the climate change and energy crises.”
Speaking about the functioning of the energy markets, Reitz acknowledged the pressure on market participants, but said the markets were functioning as they should and at price levels “no one ever thought would be possible”.
“The exchange mechanism and the clearing mechanism are key components, not only in price discovery but also in risk management,” he added.
The panelists said they were supportive of the European Commission’s proposed measures to help address liquidity constraints for wholesale market participants, including the broadening of the list of eligible collateral beyond cash, subject to safeguards, and the conditions under which bank guarantees could be accepted.
“Helping firms with their liquidity requirements is extremely important,” said Robbert Booij, chief executive officer for Europe at ABN AMRO Clearing Bank. “Expanding the list of accepted collateral will help our clients.”
Maylis Dubarry, global co-head of prime services at Société Générale, also referred to the challenging environment for clearing members and clients as a result of high margin levels. Dubarry called for further transparency from CCPs on initial margin methodologies and more certainty and predictability of upcoming margin levels. She said that such information will help clearing members and their clients better navigate the volatile environment and allow them to adjust their risk appetite in a timely fashion.
All panelists agreed that the energy crisis has lent a new sense of urgency to the task of transitioning away from coal, oil and gas and could prove to be a turning point in the clean energy transition.
“When we sit here 10 years from now, we will look back at this crisis as being the big change to push for renewable energies,” said EEX’s Reitz. “This is across all parties involved in the energy markets starting from the household that puts a solar panel on the roof to the major energy producers.”
The European Commission’s focus on shifting euro clearing from London to the EU was another hot topic, with panelists agreeing that any shift must be market-led rather than mandatory.
Before Brexit, market participants in Europe relied heavily on exchanges and clearinghouses in the UK. European policymakers have argued that with the separation of the UK, some of these markets, notably interest rate swaps denominated in euros, should be cleared in the eurozone to ensure that they have sufficient oversight to protect the European financial system.
“UK CCP equivalence and what it means if European firms are potentially cut off when equivalence expires continues to be a topic of discussion with the European Commission,” said Booij, adding that more clarity is needed from both policymakers and regulators.
“What is the risk that they are trying to address? Sometimes the perception is it could be more politically driven. It's also not very clear what the desired output is. If firms in Europe reduce their UK clearing exposure by 50%, is that good enough or not at all? These answers are really needed to define what measures will be implemented.”
Discussing the products traded on UK markets compared to European markets, Booij said there are several products for which there are no suitable alternatives in Europe. He pointed in particular to the UK markets for futures on commodities, metals and energy.
“I’m thinking about soft commodities, coffee, cocoa, I’m thinking about metals. If we, as a European clearing firm, are cut off from UK CCPS, we would no longer be able to serve a German car manufacturer, for example, to hedge their aluminium exposure, or a French oil producer hoping to hedge their exposure using oil derivatives on ICE. Those products are not available in Europe,” he said.
“Before drastic measures are put in place cutting off European clearing members, these products really need to be available, otherwise unnecessarily systemic risks will be introduced.”
European firms would be severely impacted, he added. “European end-clients would still be able to access European markets using UK and US banks. Drastic measures will likely push business away to competitors outside of here,” he warned.
Dubarry echoed these concerns, saying she supported the further development of competitive, efficient and resilient financial market infrastructure in the EU via market and client-driven solutions. However, she warned against creating a competitive disadvantage for EU clearing members who provide clearing services to international clients on UK and global markets.
“As EU clearing members, we offer access to global markets. If for any reason, we are not able to access UK markets then clients will choose other providers. This will definitely reduce our clearing capabilities and potentially impact liquidity on EU markets," she said. "So, we are coming back to the same question of how to make EU markets and CCPs more attractive.”