Regulators Warn EU Gas Cap Could Cause Instability

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The EU’s gas price cap could result in trading shifting to non-EU venues or over-the-counter (OTC) markets, which would lower liquidity and increase financial instability, the bloc’s regulators said on Monday.

The Agency for the Cooperation of Energy Regulators (ACER) and the European Securities and Markets Authority (ESMA) published separate reports on Monday assessing the potential impacts that the gas price cap — formally known as the Market Correction Mechanism (MCM) — could have on the European gas market.

While the regulators said that they had not yet observed market changes following the MCM announcement, both warned that they could not rule out future impacts on financial and energy markets.

Notably, ESMA said it is likely that the cap could lead to market participants adapting their trading activity to contracts and venues not covered by the MCM.

“Such adaptations could be achieved by various means, notably by shifting trading to OTC or to non-EU venues … Some of these adaptations are likely to reinforce trends that can already be observed today, such as the trend to move trading OTC, which is likely to further lower open interest and ultimately reduce available liquidity on regulated markets for TTF contracts,” ESMA said.

An uptick in OTC trading could increase margin calls and drive volatility.

ICE Instrument

Intercontinental Exchange (ICE), host of TTF trading, is reportedly looking at launching a new instrument in London that is similar in design to the current TTF ICE Endex contract, a well-placed trade source told Energy Intelligence.

ICE would clear block trades executed OTC at a higher price than the cap as the MCM only applies to screen orders, the source said, adding that the settlement price will not be affected by the cap. The instrument would use OTC information in cases where there was not enough liquidity in the screen when it comes to set the settlement price.

ICE would not comment when contacted by Energy Intelligence.

Following the adoption of the cap in December, the exchange operator said it would review whether it can continue to operate a market in TTF gas futures and has previously suggested it could move the trading hub outside of the EU.

Cap Launch

The MCM will go live on Feb. 15 and will be triggered if the front-month TTF contract exceeds €180 per megawatt hour for three days — and if the contract also exceeds an international LNG reference price by €35 for the same three days. The cap will also apply to other EU gas hubs but these could be exempted at a later stage, officials said in December.

While the cap will go live next month, it is unlikely that it will be triggered in the near term as TTF is currently priced at around €62/MWh.

Both ACER and ESMA suggest that the potential impacts of the cap on energy and financial markets will only become clear when the MCM is close to being triggered.

The regulators will submit more comprehensive reports examining the cap on Mar. 1.

Policy and Regulation, Gas Futures and Derivatives
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