EU Watchdog Proposes A Suspension Of Energy Derivatives Trading

By Irina Slav of OilPrice.com

The temporary suspension of trading in energy derivatives could help return EU energy markets to balance, the EU’s financial markets regulator has proposed.

The suspension would only apply when prices reach a certain level, the European Securities and Markets Authority, or ESMA, explained, noting that the number of such temporary suspensions in the past few weeks has been very low despite already existing circuit breaker mechanisms in use.

“We would envisage these mechanisms to trigger halts for a limited period of time only and in exceptional circumstances, for instance, in case of extreme volatility spikes that may lead to disorderly trading conditions,” Verena Ross, chairwoman of ESMA, wrote in a letter to John Berrigan, director-general of the EC’s financial stability, financial services, and capital markets union department.

“In our view such a measure, by allowing pauses in trading, would support a more orderly price discovery process as it is intended to provide more time to market participants to process the flow of information during extreme market stress scenarios,” Ross also wrote.

Interestingly, the Financial Times reported this week that the European Commission had privately admitted there was little that could be done by way of intervention in energy markets, and that the stress on the market was not a result of a “malfunction” as some officials claimed earlier.

ESMA’s springing into action comes in response to a liquidity crisis on European energy markets, resulting from the heightened price volatility, especially in natural gas. Because of this volatility, a lot of players in the energy market have found themselves in a position where they cannot respond to margin calls because they had not anticipated them when they made their trading decisions.

The EC has pledged to help, including by direct intervention in the market and by direct liquidity injections to companies in need of one.