ESMA - ESMA finds high degree of concentration in natural gas derivatives markets

This week ESMA, the pan-EU financial market regulator, published this study examining the structure and functioning of EU gas markets in light of the significant changes to the market since the start of the Ukrainian conflict. The report provides useful insights into the drivers of EU gas markets which have come under significant scrutiny since the start of the EU energy crisis and pays specific attention to Central Clearing Counterparties (CCPs), transparency and risk concentrations. They highlight several contributors to data fragmentation inherent in the current regime including: 

• Physically settled gas derivatives do not qualify as financial instruments under MiFID and are excluded from MiFID transparency and reporting requirements;
• Open positions of market participants at trading venue level (excluding positions in OTC derivatives) are reported to NCAs but not directly to ESMA;
• EMIR provides detailed information on EU entities but does not cover non-EU counterparties even if they trade on EU venues making EU level analysis difficult; and
• Most energy firms are not MiFID regulated and hence are exempted from a range of reporting requirements.

The report concludes that energy firms and financial institutions are very closely connected increasing the chances of transmitting financial shocks. This is exacerbated by the fact that many energy firms are non-financial companies and hence are subject to less oversight and reporting than financial institutions and are therefore generally less transparent. 

RegTrail Insight

The significant stresses experienced by many European gas market participants following the start of the Ukrainian conflict awakened many to the fact that this market, under extreme conditions, can pose a threat to systemic stability.

EMIR, now over a decade old, was designed to increase transparency over derivative markets in order to reduce this risk. Many have come to question its effectiveness during the recent crisis during winter where, were it not for direct intervention by governments, a systemic event might well have occurred.

As a result, there appears to be a consensus developing that further work is required to ensure that the transparency regimes indeed capture the full picture, including physical instruments. This increases the likelihood that the loosening of rules for non-financial firms may well be reversed, and additional rules added to close these gaps.