MEPs on Thursday sought to shed light on the workings of the energy derivatives markets to see what can be done to avoid further dramatic price volatility in this area.
During a hearing in the Economic and Monetary affairs committee, MEPs heard from John Berrigan, European Commission Director General for Financial services, financial stability and Capital Markets Union, Verena Ross, Chair of the European Securities and Markets Authority, and Hanzo van Beusekom, member of the Board of Dutch Authority for the Financial Markets. They provided their assessment of the current situation regarding the energy derivatives markets and potential actions needed at Union level and fielded questions from MEPs.
You can follow the hearing again here(scroll time-bar to 10.07).
Opening the hearing, committee Chair Irene Tinagli said that many events happening at the same time had made the energy market vulnerable to abuse. Coupled to this, the dramatic impact the price increases had had on households and firms and the peculiar nature of the energy market all made it important to pay particular attention to what was happening.
Where were the safeguards?
MEPs asked why none of the safeguards to halt or temporarily suspend trading had ever kicked in despite the periods of very high price increases, and even during periods when incorrect information was circulating. The invited speakers explained that despite the price increases, these were not large enough to trigger suspension of trading, through so-called circuit breakers. MEPs retorted that if such price increases could not trigger the circuit-breakers, then their operating variables should be reviewed. MEPs also underlined that the high volatility of price itself should have led to trading being suspended, irrespective of whether the price was very high or not.
Market manipulation
The worry that the size of the energy derivative market was too large, a reminder of the situation before the sub-prime crash, was also raised by MEPs, who asked to what extent was this a sign of market manipulation. MEPs also sought clarifircation about the distinction between what regulators consider normal market speculation and what is market manipulation. Respondents explained that a difference must be made between a market functioning under stress, which was happening in this particular case, and a non-functioning or manipulated market.
Worrying trends
MEPs also asked for more information on trends within the energy derivatives markets, notably the extent to which so-called over the counter trading (private trading between parties) has replaced trades on regulated exchanges, and if this trend is worrying, and whether suspicious transaction reports (STRs) had increased from previous years. Respondents confirmed that both these trends had increased over 2022 with Mr Berrigan adding that the upward trend for over the counter trading was worrying and could warrant a response if it continued.