EMIR regulation to hit British, Dutch natural gas forward trade and immature markets - conference
The inclusion of gas transactions in the EU’s European Market Infrastructure Regulation (EMIR) could hamper forward trade at the British NBP and Dutch TTF and drive liquidity out of less mature gas hubs, contributors at the 7th ICIS European Gas Conference in Amsterdam have said.
“The likelihood is that liquidity will be hit down the curve, and will instead consolidate on the front six months at the NBP and the TTF, while less mature hubs will see liquidity move away,” said Les Male, senior director at CME Group, which provides clearing services.
A decision is expected in December on whether gas trade will be classified as a derivative contract and therefore included in EMIR. This would mean transactions would need to be cleared by a central counterparty and with the requirement to report the trades to a central repository.
The majority of NBP and Dutch gas trade is done through brokers with a smaller percentage through exchanges. The volume of trade currently cleared is much lower and has shown little sign of increasing, despite the potential change in regulation.
“I’ve had some discussions with energy companies recently and there seems to be a tactic from some to remain just below the volume threshold at which central clearing would kick in – I’m not sure this is the best tactic,” Male added.
The gross notional value of the clearing threshold is €3bn for commodity derivatives, according to technical standards set by the European Securities and Markets Association.
Members of a panel discussion expressed some concern over the impact of a drop in liquidity on curve contracts which could potentially lead to greater risk when taking out a position. This could also reduce the desire to trade in emerging markets where liquidity is already lower, further increasing the risk of not being to get out of a position.
The UK’s Financial Conduct Authority (FCA) has already indicated that gas should be considered a derivative, but have given brokers until 16 December to decide how they will classify their systems.
A number of banks have stepped out of NBP and European trade since the financial crisis in 2008 with the closure of proprietary trading desks. This has reduced liquidity on further-dated contracts where financial institutions often trade, although hedge funds have reportedly taken up a more active role. Ed Cox
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