Energy traders would have to pile up an additional $33 billion in deposits if Brussels’ plan to cap the price of a key European gas benchmark goes ahead, a top exchange operator has warned.
Producers and traders relying on the Dutch TTF futures market face an 80 percent increase in the payments they pay to secure their trades, the Intercontinental Exchange told the European Commission, according to a memo reported by the Financial Times.
Such a large increase in margin requirements “could destabilize the market,” ICE, the Atlanta-based group that operates the TTF market, said in the note. ICE declined to comment.
Margin requirements for swaps and futures contracts used by energy producers have already doubled this year, according to the European Central Bank, forcing many companies to take out credit lines from their banks and conduct more private deals 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 spiked over the summer as Russia’s invasion of Ukraine and sweltering temperatures hit inventories, dampened economic performance across the bloc and forced energy companies to earn billions of euros in emergency funds.
The 27 EU member states are trying to hammer out an agreement that can be implemented by the end of the year. On Tuesday, the committee recommended capping the price of the upcoming contract in the TTF market. TTF accounts for about four-fifths of the block’s gas trade.
Brussels has proposed capping the gas price if it reaches 275 euros per megawatt hour for two consecutive weeks and if the difference between the reference value for the European cost of liquefied natural gas is at least 58 euros/MWh within 10 days. At those levels, the cap would not have been triggered even when gas prices soared to unprecedented levels this summer, leading critics to question the limits’ usefulness.
The diplomats of the 15 EU member states advocating for the upper limit – fearing that another increase in gas prices in the winter could cause social unrest and further strain the public finances – indicated that their governments are against this at such a high level.
But ICE warned that any kind of cap would mean more risk and more private deals in the upcoming contract, forcing the exchange to ask customers for more money upfront. The risk was “immediate,” the statement said.
The exchange’s $33 billion estimate covered both the initial margin, which protects customers from the risk of default, and the variation margin, which covers daily market price fluctuations.
A potential spike in margin requirements would hit an already-stressed market as energy trading firms struggle to find money to hedge their futures contracts, which are widely used by energy producers and consumers to guarantee supply and the price they receive.
In September, Germany and other member states were forced to offer liquidity support to energy companies struggling with margin requirements.
The AFM, the Dutch regulator that oversees the TTF futures market, also warned that the cap could temporarily halt trading and force more deals into private, over-the-counter negotiations.
According to Commission experts, the mechanism would be suspended within a day if there was a risk of diverting critical gas shipments, affecting financial stability or causing an increase in consumption.
“We understand that when you intervene in a derivatives market, there are consequences [and] we have discussed these implications with experts,” said a senior EU official.
The person added that the mechanism is “calibrated to respond to the risks mentioned” but also has “necessary safeguards”. . . to ensure that if anything serious happens, we have everything we need to respond quickly and quickly”.
The commission did not immediately respond to requests for comment on the ICE memo.
Additional reporting by Sam Fleming