European Commission eyes alternative gas benchmark

The European Commission has outlined plans to create an alternative gas benchmark, tackle energy companies' liquidity issues and use "circuit breakers" to interrupt trading.

The commission views European gas hub prices as "not truly representative of supply and demand conditions in international gas markets". In order to address what it sees as an unrepresentative price marker, the commission is working to develop a "complementary transactions-based price benchmark that more accurately reflects the market for gas imports". This new price marker would be based on all EU gas imports, including LNG deliveries to European terminals, and would therefore not reflect internal bottlenecks in the EU's pipeline network, the commission reasoned.

The commission's aim is to provide market participants with reference prices for gas imports that could be used instead of hub prices, but without phasing out hub pricing, it said.

As a first step, the commission will conduct a feasibility assessment on the entity best placed to operate a European platform for all transaction data related to gas deliveries to the EU. The reporting hub would then establish a "price-weighted benchmark" on the basis of either daily or weekly transaction data.

As a second step, the price-weighted benchmark would be tendered to an authorised EU-based benchmark administrator who would publish it on a daily basis. The final step would consist of promoting a futures market settling against this new price benchmark, in a bid to create the liquidity that would "initially be missing", the commission said.

Addressing energy companies' liquidity issues

The commission has also tasked different bodies with presenting amendments that would address energy companies' liquidity problems.

Energy firms have had to post increasing amounts of cash collateral to central clearing counterparties (CCP) as margin calls have increased in line with surging prices, resulting in liquidity problems for some companies, the commission said.

As a consequence, the commission has asked EU financial regulator Esma to present appropriate amendments by 22 September, to broaden the list of eligible collateral and the conditions under which bank guarantees could be accepted as collateral.

The commission has tasked the European Banking Authority (EBA) with assessing bank mechanisms for companies to use collateral to get cash by 29 September.

Esma and the EBA will be invited to look at ways to increase the transparency and predictability of initial margin models, the conditions under which a CCP can call intraday margins. The bodies will also explore whether such intraday calls should be replicated for energy firms, with a view to improving the predictability of margins for non-financial firms.

The commission has also invited Esma to "assess the appropriateness" of a recommendation made in June to increase the clearing threshold for commodities and other derivatives to €4bn from €3bn.

And it outlined plans for a wider consultation to discuss measures to facilitate the provision of margins by energy firms.

Possible amendments to the rules applicable to collateral for margin calls "would be temporary and apply only to gas and electricity derivatives", it said.

Trading venue ‘circuit breakers' under scrutiny

The commission has asked Esma to investigate why circuit breakers have yet to be triggered in the energy crisis, and to explore whether the rules need to be aligned across the EU.

EU regulation states that trading venues "be able to temporarily halt or constrain trading if there is a significant price movement in a financial instrument on that market or a related market during a short period", requiring all EU trading venues to have circuit breakers in place.

Esma needs to report its findings by 29 September. And the commission has also asked the financial regulator to consider a more harmonised approach to circuit breakers and "report back with concrete proposals by 17 October".

By Auguste Breteau