Cash flow risks in energy trading will remain in focus going forwards, which should spur a rebuild of the over-the-counter (OTC) market on an even basis with exchanges, industry representatives said at the Equias conference in Brussels this week.
The energy market "largely forgot" about cash liquidity issues in energy trading following a number of energy crisis situations between 2003 and 2007, with this type of risk only sporadically receiving attention for over a decade, technology consulting firm CommodityFirst senior partner Petter Torp said on 20 June. An energy company's traditional risk framework was on market price risk and credit risk, which are interdependent to some extent, he said.
Cash risks then came dramatically into focus in 2022, and the market was unprepared for this, Torp said. Governments stepped in to help trading firms deal with increased margining requirements on exchanges. Under a German support scheme introduced in April 2022 that will run until the end of this year, firms can receive credit lines from state-owned bank KfW, secured by a federal guarantee.
Market risk and cash liquidity risk will receive "more balanced attention" going forwards, Torp said. And Europe and the US are now out of a period in which "cash has been for free", following the recent strong increase in interest rates to combat inflation, Torp said.
The amount of government money that has been pumped into the energy industry in general will soon exact a price, European energy traders' association Efet's operations committee secretary, Stuart Beeston, warned. The aftermath of the financial crisis led to a reshaping of the energy trading landscape through the European market infrastructure regulation (Emir) and the financial instruments directive (Mifid). "Sooner or later, someone will look at the industry's operating costs," so now is the time to implement operational changes, Beeston said.
In this context, the energy industry needs to turn its attention to making OTC trading more efficient and standardised, several industry representatives said.
The industry needs to draw lessons from the price shocks of 2022 in order to become more resilient to future ones, OTC software developer Equias' chief executive, Hugh Brunswick, told delegates.
Trading firms need OTC and exchange-based trading in equal measure, in order to balance out heightened credit risk on exchanges with greater liquidity risk in the OTC space, Spanish firm Endesa's head of contracts and credit risk, Juan Moya, said.
And exchanges need to "feel the OTC markets near them" to be incentivised to update their risk policies and reduce the amount of collateral that can be posted, Moya said.
