The European Securities and Markets Authority (ESMA) proposed measures to alleviate the liquidity pressure on non-financial counterparties (NFCs) active on gas and electricity regulated markets cleared in EU-based CCPs.
ESMA’s Final Report provides draft regulatory technical standards (RTS) which temporarily expand for a period of 12 months the pool of CCP eligible collateral to uncollateralized bank guarantees for NFCs acting as clearing members and to public guarantees for all types of counterparties.
ESMA will continue to work on other potential measures to respond to the extreme volatility in the energy markets. The Final Report was sent to the European Commission for endorsement and will then be subject to a scrutiny procedure by the European Parliament and the Council.
From the final report:
“Enabling NFCs acting as clearing members to meet initial margin requirements via uncollateralized commercial bank guarantees would ease the burden of maintaining an appropriate liquidity buffer for stressed market situations and promote hedging activities on transparent and functioning regulated markets, in Member States where shifts to the uncleared bilateral space have been observed.
“As opposed to initial margin, which constitutes the majority of margin posted at the CCP for energy derivatives, variation margin calls are expected to continue to be paid in cash in line with market practice. However, such an extension would entail additional default, liquidity, legal and operational risks as the commercial bank guarantees would no longer be backed by collateral to which the CCP would have prompt access in case the issuing bank is not honoring the guarantee in a timely manner.
“Given the above outlined risks and the significant uncertainties linked to their use, ESMA believes that uncollateralized commercial bank guarantees should only be made eligible as collateral to specifically help NFCs acting as clearing members and facing liquidity strains in energy derivatives markets. These should be subject to strict conditions to ensure that the associated risks are appropriately managed.”