Access to trading and clearing in case of economic sanctions
EEX, as an exchange established under public German law, and ECC, as a Central Counterparty (CCP), are required by regulation to admit members based on non-discriminatory, transparent and objective criteria in accordance with applicable law.
Accordingly, EEX and ECC monitor relevant sanction regimes and implement measures as required by the relevant sanction regime.
ECC’s has established a robust CCP Risk Management framework based on the various lines of defense.
ECC’s initial margin methodology complies with the European Market Infrastructure Regulation (EMIR). ECC updates the initial margin rates on a daily basis, using the latest settlement prices obtained from the relevant markets. The margin rates therefore reflect the current levels of prices and volatility. Margin requirements can be covered with a wide range of eligible collateral.
Physical settlement in case of imbalances
Besides the financial settlement, the clearing house ECC also ensures the physical settlement of all respective transactions. With this respect, ECC closely cooperates with European Transmission System Operators (TSO) and Hub Operators for power and natural gas.
The European natural gas and power markets are divided into
- the physical flow layer, where physical entries respectively production and consumption volumes are managed by the grid operator having own balancing measures and
- the commercial rights layer on the so called Virtual Trading Points (VTPs).
Power and natural gas transactions cleared by ECC are related to Virtual Trading Points and therefore decoupled from the physical flows. If any imbalances occur, the relevant and individual rules and costs of each TSO or hub operator will apply.
> Find out more on effects of a missing physical gas delivery on ECC.
Please see also the ECC Clearing Conditions in which section 4.8.5 deals with deviations in the physical settlement of grid-bound energy contracts.
The importance of keeping energy markets open in turbulent times
Regulated exchanges operating the wholesale energy markets provide essential transparency on prices and the physical underlying of energy supply and demand. A robust and transparent price formation process, combined with sound policies to ensure an orderly market, is essential under any market circumstances but especially when markets are moving.
In an environment where uncertainty makes it unusually hard to price assets, exchanges provide real-time information which serve as an indicator for response measures to this crisis by the companies most affected and the economy overall. In addition, by trading on an exchange, possible risks of market participants, in particular default risk are secured by the clearing house – a function especially important during economic turmoil.
Price caps on wholesale gas markets lead to significant negative side effects without having the desired results
The role of gas prices:
- On spot markets, gas prices reflect the fundamental physical situation. They are essential for short-term adjustment.
- On futures markets, gas prices reflect the expection of the future physical situation. They are essential for hedging price risks and guiding investment decisions.
- Market prices are the core of the allocation function of the market. When determined under transparent conditions, like on an exchange market, they connect sellers and buyers.
Why caution before intervention is warranted:
A gas price cap1 undermines the basic economic principle of price signals and leads to significant unintended negative side effects such as:
- Move towards less transparent trading: OTC-transactions could be concluded at a different price than on the exchange. A shadow gas market with shadow gas prices might arise.
- Impair the negotiating position of European actors: A wholesale gas price cap would make EU-destinations less attractive for very price-sensitive LNG.
- Distortion of the short-term price signal and the market as allocation mechanism: It would bring inefficient distribution of physical/financial resources, distorted incentive for energy efficient consumption behaviour, loss of efficient allocation mechanism.
- Negative impact on long-term gas price signal and hedging function: Traders would not be able to transparently hedge against price and counterparty risk.
- Disincentivise decarbonisation: Renewable energy, including renewable gases, needs high-price periods to improve their competitiveness.
- Uncertainty around execution of contracts already entered into: Capping prices undermines forward contract conditions leading to an increase of political risk.
What needs to be done:
- Prioritize short- to medium-term framework conditions to diversify supply and ensure an adequate level of stored gas and;
- Support vulnerable households to cope with the situation on the retail-level.
Until there is an actual physical shortage of gas, the market is the most efficient and effective allocation mechanism based on flexible market price signals. Capping wholesale market prices may even lead to physical supply shortage.
1 In the frame of this position paper, gas price caps are understood as a fixed, politically-set limit to wholesale gas market prices stable over the medium to long term.