More deals in Europe’s €4 billion natural gas derivatives market have been moved off-exchange by Russia’s full-scale invasion of Ukraine as pressured companies look to save on trading costs, he warned the securities supervisory body of the European Union.
A report on Friday by the European Securities and Markets Authority found that the share of trading on the over-the-counter opaque market jumped from 15% last summer to 27% this year, moving away from futures exchanges regulated.
The agency said the change was led by power groups and may have been linked to a push to save the margin used for trading. Producers and traders who rely on futures markets to hedge against volatile price movements and lock in supply months in advance were saddled with soaring margin calls last year.
The prices of gas in Europe it rose to record levels after the invasion of Russia and was exacerbated by scorching temperatures. The European benchmark TTF started the year at around €90/megawatt hour, but traded at more than €300/mWh in the summer and ended the year at around €75/mWh. Prices have fallen further since the start of the year, hitting €32.25/mWh on Friday, as European storage is filled with an unusually high amount of gas for this time of year.
However, margin payments, required by exchanges as insurance to secure business, have more than doubled in 2022, according to the European Central Bank. This has forced many companies to draw on lines of credit with their banks, seek emergency funds, and conduct more trades privately, where margin requirements are lower.
The EU also introduced a cap on the price of exchange-traded gas, but exempted the over-the-counter market. Analysts warned last year when the EU was drafting the cap that trading would migrate to over-the-counter markets.
While most trading is still conducted on exchange, the move to OTC “raises concerns due to the more limited transparency and more tailored margin and collateral requirements in that market segment,” Esma said.
The volatile market pushed the annual turnover of natural gas derivatives on EU futures exchanges to €4.1 billion last year, with open positions of EU companies amounting to around €500 billion, he said the authority.
However, he also found that the market was becoming increasingly concentrated as the funds exited and left banks and energy companies as the main traders. “Some energy companies hold relatively large derivatives positions,” Esma noted.
The EU has warned that its price ceiling could be lowered if too many trades shift to over-the-counter deals that are “less transparent, less subject to regulatory scrutiny and carry greater risks of default for the parties involved”.
Intercontinental Exchange, which operates the main trading hub for gas in the EU, opened a gas contract in London as insurance against disruption to the EU market, but few traders, apart from some early tests, have made extensive use .
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