EU gas price cap would hit market by $33bn, says ICE

Energy traders are expected to shell out another $33 billion in margin payments if a plan by Brussels to cap the price of a major European gas benchmark goes ahead, a major exchange trader has warned.

Manufacturers and traders who rely on the Dutch TTF futures market face an 80% increase in the payments they make as insurance to secure their business, Intercontinental Exchange told the European Commission, according to a memo seen by the Financial Times.

Such a large increase in margin requirements could “destabilize the market,” ICE, the Atlanta-based group that manages the TTF market, said in the statement. ICE declined to comment.

Margin requirements on swaps and futures used by energy producers have already doubled this year, according to the European Central Bank, forcing many firms to draw on lines of credit with their banks and conduct more private deals, where margin requirements they are inferior.

The ICE warning comes as EU authorities scramble to finalize an expected cap on the region’s gas prices, which soared over the summer as Russia’s invasion of Ukraine and scorching temperatures hit supplies, curbed economic output across the bloc and forced EU energy companies to seek billions of euros in emergency funds.

The 27 EU member states are trying to finalize a deal that can be implemented by the end of the year. The commission on Tuesday proposed capping the price of the next contract on the TTF market. The TTF accounts for about four-fifths of gas trade in the bloc.

Brussels has proposed capping the price of gas if it reaches €275 per megawatt-hour for two consecutive weeks and if the difference between this and a European liquefied natural gas cost benchmark is €58 per MWh or more for 10 days in those weeks. At those levels, the cap would not have been triggered even as gas prices soared to unprecedented levels this summer, leading critics to question the usefulness of the brakes.

Diplomats from the 15 EU countries who have been pushing for a cap – fearing another hike in gas prices this winter could trigger social unrest and further strain public finances – signaled their governments would oppose at such a high level.

But ICE warned that any type of limit would mean the upcoming contract would include more risk and incorporate more private deals, which would force the exchange to ask customers for more money upfront. The risk was “instantaneous,” she said.

The exchange’s $33 billion estimate covered both initial margin, which protects counterparties from default risk, and variation margin, which covers fluctuations in daily market prices.

A potential increase in margin calls would hit a market that is already under pressure as energy trading firms struggle to find the cash to shore up their futures trades, widely used by energy producers and consumers to secure supplies and guarantee the price they will receive.

In September, Germany and other member states were forced to offer liquidity support to energy companies grappling with collateral claims.

The AFM, the Dutch regulator that oversees the TTF futures market, also warned that a cap could temporarily halt trading and force more deals to be negotiated privately, away from the exchange.

The mechanism would be suspended within a day if it were to risk critical gas supplies being sent elsewhere, jeopardizing financial stability or causing an increase in consumption, according to the commission’s experts.

“We are aware that when you intervene in a derivatives market, there are implications [and] we have discussed those implications with experts,” said a senior EU official.

The person added that the mechanism was “calibrated to respond to those risks,” but also had “necessary safeguards. . . to ensure that if something serious were to happen we have what it takes to respond and react quickly.”

The commission did not immediately respond to a request for comment on the ICE memo.

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