Several industry associations have expressed concerns about the European Commission's intentions to toughen oversight over gas derivatives markets.
Gas is a focus point of the commission's consultation launched in late February to assess trading practices in derivative commodity markets, as part of its clean industrial deal strategy.
Several industry associations have pushed back against the commission's plans, arguing that gas derivatives markets provide liquidity and facilitate hedging for physical trades.
Energy derivatives markets "play a crucial role in providing stability instruments" to allow the efficient management of price risks in volatile energy markets, the association of European energy exchanges Europex said.
A central element of the consultation is the introduction of different position limits for physically-settled and cash-settled derivatives, in line with the laws governing futures trading at the US' Henry Hub. The commission also asks participants whether position limits should be differentiated depending on the type of trader or trading activity.
Introducing broad position limits could significantly reduce market liquidity and make it harder for companies to manage risk, trade association Eurogas told Argus. "Position limits should only be considered for highly liquid benchmark contracts and should include a well-designed hedge exemption."
The association also "strongly cautions against narrowing" the ancillary activities exemption (AAE). The AAE exempts energy from conduct and prudential rules applicable to investment firms for which gas derivatives trading is supplementary to their main commercial business. Ending the exemption "would likely reduce market participation, increase market concentration, and raise costs for end consumers", Eurogas warned. Eurogas argues that the existing regulatory framework already provides "extensive oversight". Fellow industry group Energy Traders Europe also advises against the end of the exemption, telling Argus that it would hamper liquidity and reliability of physical and financial energy trading markets.
The commission is gathering comments regarding the creation of a database gathering all open positions held by market participants. Eurogas encouraged the commission to carefully assess any new reporting requirements to prevent unnecessary administrative burdens.
Energy Traders Europe said that it is still considering its stance on position limits and the database idea, in general regulatory changes should be thoroughly reviewed "before potentially costly and counterproductive measures are implemented".
Former European Central Bank (ECB) president Mario Draghi raised concerns about the disruptive effect of mounting activity and speculation in the gas derivatives market in a landmark report published in September. Most of Draghi's proposals to tighten supervision are included in the consultation.
Financial institutions such as hedge funds have increased their participation in gas trading markets in recent years, as greater price volatility opened up new arbitrage opportunities.
Investment funds' net long TTF position on the Intercontinental Exchange reached an all-time high of nearly 273TWh by 15 November. Net long TTF positions held by these funds have since fallen significantly in recent weeks following a drop in European gas prices.
