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Abstract
Because of the excessive prices and volatility in the energy derivatives markets over the period 2021–2023, margins increased considerably, leading major European energy companies to experience liquidity stress in meeting those. As a consequence, several local governments needed to provide guarantees to avoid their default. This article includes several legislative proposals to ensure that energy firms are prudentially safer and that there exists a level playing field among financial actors active in the same market segment. Specifically, this article proposes to (1) decrease the clearing threshold for commodity derivatives under the European Market Infrastructure Regulation (EMIR), (2) narrow the definition of hedging relevant to the calculation of the clearing threshold, (3) remove the intragroup exemption possibility under EMIR, and (4) make sure that energy firms can be categorised more easily as investment firms.
Acknowledgements
The information contained in this article is the personal view of the author solely and not of the FSMA. This article also does not bind the FSMA in any way. The author is responsible for any errors or omissions. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. The author likes to thank Giuseppe Bellia, Guillaume Bérard, An De Pauw, Gaston Fornes, Sébastien Martino, Alvaro Mendez, Jean-Paul Servais, Damien Sohet, Antoine Van Cauwenberge, Jean-Michel Van Cottem, Joachim Van Wymeersch and Sofie Verweire for useful input.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1 Financial Times, War in Ukraine: What Explains the Calm in Global Stock Markets, 2022 <www.ft.com/content/4c4c4c04-151c-467c-b011-136d56546da9> accessed 26 September 2023
2 See Randy Priem, A Relaxation of Commodity Derivatives Clearing Legislation as a Consequence of the 2021–2023 Energy Crisis (2003) SSRN Working Paper <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4448470> accessed 10 May 2023
3 See ESMA, Trends, Risks and Vulnerabilities, 2022 <www.esma.europa.eu/sites/default/files/library/esma50-165-2229_trv_2-22.pdf> accessed 10 May 2023
4 See Erik R Larsen, Ann van Ackere and Sebastien Osorio, ‘Can Electricity Companies too Big to Fail?’ (2018) 9 Energy Policy 96
5 For instance, Germany set aside 7 billion euros in loans to be made available to companies facing liquidity issues
6 See Bloomberg, Lagarde Says ECB Can’t Offer Liquidity to Energy Firms, 2022. <www.bloomberg.com/news/articles/2022-09-09/lagarde-says-ecb-can-offer-liquidity-to-banks-not-energy-firms> accessed 10 May 2023
7 See European Commission, State Aid: Commission adopts Temporary Crisis and Transition Framework to Further Support Transition Towards Net-zero Economy, 2023. <https://ec.europa.eu/commission/presscorner/detail/en/ip_23_1563> accessed 10 May 2023
8 REGULATION (EU) No 648/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 4 July 2012 on OTC derivatives, central counterparties and trade repositories<https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32012R0648> accessed 10 May 2023
9 European Central Bank, Financial Stability Risks from Energy Derivatives Markets, 2022. <www.ecb.europa.eu/pub/financial-stability/fsr/special/html/ecb.fsrart202211_01~173476301a.en.html> accessed 10 May 2023
10 ESMA, Preliminary Data Report On the Introduction of the Market Correction Mechanism, 2023. <www.esma.europa.eu/sites/default/files/library/esma70-446-775_preliminary_data_report_on_mcm.pdf> accessed 10 May 2023
11 See Ivan Daiz-Rainey, Mathias Simes and John K Ashton, ‘The Financial Regulation of Energy and Environmental Markets’ (2011) 19(4) Journal of Financial Regulation and Compliance 355
12 Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on Markets in Financial Instruments and Amending Regulation (EU) No 648/2012; see <https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014R0600> accessed 10 May 2023
13 Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC Derivatives, Central Counterparties and Trade Repositories; see <https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32012R0648> accessed 10 May 2023
14 See Randy Priem, ‘A Relaxation of Commodity Derivatives Clearing Legislation as a Consequence of the 2021–2023 Energy Crisis’ (2023) SSRN Working Paper <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4448470> accessed 10 May 2023
15 See Randy Priem, ‘Intra-Day Volatility Mechanisms as a Consequence of the 2021–2023 Energy Crisis’ (2023) SSRN Working Paper <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4448498> accessed 10 May 2023
16 See Randy Priem, ‘Introduction of a Market Correction Mechanism Regulation as a Consequence of the 2021–2023 Energy Crisis’ (2023) SSRN Working Paper <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4452681> accessed 10 May 2023
17 Figure 1 does not display the role of commodity funds or hedge funds that are also active in the market. For more information, see <www.fsb.org/2023/02/the-financial-stability-aspects-of-commodities-markets/> accessed 10 May 2023
18 TTF derivative is a commodity derivative as defined in Article 2(1) of Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments (ie MiFID II) traded on a regulated market, underlying which is a transaction in the Title Transfer Facility (TTF) operated by Gasunie Transport Services
19 Variation margins are mark-to-market and initial margins often increase because margin models used by CCPs require higher levels of collateral to compensate for heightened volatility of derivatives
20 See ESMA, Preliminary Data Report On the Introduction of the Market Correction Mechanism, 2023. <www.esma.europa.eu/sites/default/files/library/esma70-446-775_preliminary_data_report_on_mcm.pdf> accessed 10 May 2023
21 See European Central Bank, Financial Stability Risks from Energy Derivatives Markets, 2022. <www.ecb.europa.eu/pub/financial-stability/fsr/special/html/ecb.fsrart202211_01~173476301a.en.html> accessed 10 May 2023
22 See ESMA, Public Register for the Clearing Obligation under EMIR, 2023. <www.esma.europa.eu/sites/default/files/library/public_register_for_the_clearing_obligation_under_emir.pdf> accessed 10 May 2023
23 See eg Ben S Bernanke, ‘Clearing and Settlement during the Crash’ (1990) 3(1) Review of Financial Studies 133
24 Meaning that they have positions exceeding the clearing threshold as specified under Article 10(3) of EMIR and become subject to the clearing obligation for future contracts in accordance with Article 4 of EMIR if the rolling average position over 30 working days exceeds the threshold
25 See ESMA, ESMA proposes EUR 1 billion increase of the commodity derivatives EMIR clearing threshold, 2022. <www.esma.europa.eu/press-news/esma-news/esma-proposes-eur-1-billion-increase-commodity-derivatives-emir-clearing> accessed 10 May 2023
26 Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R2251&rid=1> accessed 10 May 2023
27 Commission Delegated Regulation (EU) No 149/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, and risk mitigation techniques for OTC derivatives contracts not cleared by a CCP <https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:052:0011:0024:EN:PDF> accessed 10 May 2023
28 Discussion Paper on the Review of the Clearing Thresholds under EMIR (europa.eu) accessed 10 May 2023
29 See ESMA, Report on the review of the clearing thresholds under EMIR, 2022. <www.esma.europa.eu/sites/default/files/library/esma70-451-502_report_on_the_review_of_the_clearing_thresholds_under_emir.pdf> accessed 10 May 2023
30 Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories (ie EMIR Refit) introduced a mandate for ESMA to periodically review the clearing thresholds and, when necessary, propose amendments to update them
31 See the no-action letter of the CFTC <www.cftc.gov/system/files/csl/final/pdfs/19/1561667900/19-14.pdf> accessed 10 May 2023
32 See ESMA, Discussion paper on the review of the clearing thresholds under EMIR, 2022. <www.esma.europa.eu/press-news/consultations/discussion-paper-review-clearing-thresholds-under-emir> accessed 10 May 2023
33 See ESMA, Final Report EMIR RTS on the commodity derivative clearing threshold, 2022. <www.esma.europa.eu/sites/default/files/library/esma70-451-114_final_report_review_of_the_commodity_derivative_clearing_threshold_under_emir.pdf> accessed 10 May 2023
34 In this paper, defined as the activity of holding derivative financial instruments to reduce the exposure to marketable risk
35 Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards <https://eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX%3A32002R1606> accessed 10 May 2023
36 See ESMA, Q&A on EMIR implementation, 2023 <www.esma.europa.eu/document/qa-emir-implementation> accessed 10 May 2023
37 See ESMA, Discussion paper on the review of the clearing thresholds under EMIR, 2022. <www.esma.europa.eu/press-news/consultations/discussion-paper-review-clearing-thresholds-under-emir> accessed 10 May 2023
38 Ibid
39 See ESMA,ESMA responds to the EU Commission regarding recent developments in the energy derivatives markets, 2022. <www.esma.europa.eu/press-news/esma-news/esma-responds-eu-commission-regarding-recent-developments-in-energy-derivatives> accessed 10 May 2023
40 Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0834> accessed 10 May 2023
41 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0065> accessed 10 May 2023
42 See eg Articles 3, 6, and 26 of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (MiFIR) <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0600> accessed 10 May 2023
43 See ESMA, ESMA responds to the EU Commission regarding recent developments in the energy derivatives markets, 2022 <www.esma.europa.eu/press-news/esma-news/esma-responds-eu-commission-regarding-recent-developments-in-energy-derivatives> accessed 10 May 2023
44 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013R0575> accessed 10 May 2023. For instance, investment firms would need to have capital that accounts for the risks stemming from the market risk of their derivatives portfolios, potential counterparty defaults, operational risks and the concentration of exposure to a single counterparty. Regarding the market risk of their derivatives positions, known as net position risk (NPR), many trading firms use the simplified approach contained in the capital requirements regulation (CRR) for banks. Trading firms would need to hold capital amounting to 15 per cent of their net positions and 3 per cent of their gross derivatives exposure. Energy firms would also need to hold liquid assets equivalent to at least one-third of their fixed overhead costs, making them more resilient to margin calls
45 Directive 2016/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0065> accessed 10 May 2023
46 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013L0036> accessed 10 May 2023
47 See European Commission, Coronavirus response: How the capital markets union can support Europe’s recovery, 2020.<https://finance.ec.europa.eu/publications/coronavirus-response-how-capital-markets-union-can-support-europes-recovery_en> accessed 10 May 2023
48 Commission Delegated Regulation (EU) 2021/1833 of 14 July 2021 supplementing Directive 2014/65/EU of the European Parliament and of the Council by specifying the criteria for establishing when an activity is to be considered to be ancillary to the main business at group level <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32021R1833 > accessed 10 May 2023