Energy market seeks emergency liquidity for clearing banks

March 24, 2022|Written by Graham Caswell|European Central Bank

As Russia’s invasion of Ukraine and Europe’s ongoing dependence on Russian gas continue to disrupt fossil fuel markets, large energy companies and traders are lobbying central banks for “emergency liquidity funding” for banks clearing energy trades.

According to an unpublished document from the European Federation of Energy Traders (EFET), seen and reported on by, energy traders are facing huge margin calls on derivatives used to hedge against price rises, with some at risk of default.

“Margin requirements have reached a level where multiple market participants face a risk of not having sufficient cash reserves to meet margin calls and are considered by the clearing bank as defaulting,” the document says, calling on central banks and public institutions to provide “emergency liquidity funding” to banks clearing energy trades.

Although not directly mentioned, the European Central Bank (ECB) is likely to be a primary target of this lobbying.

While Ukrainian refugees disperse across Europe and governments condemn Russian aggression, the EU continues to be a major funder of the Putin regime through its purchases of Russian coal, oil and gas. In response, the European Commission has published an emergency plan to reduce EU demand for Russian fossil gas by two-thirds before the end of the year, with consequent effects on energy prices. Uncertainty also comes from the Russian side, as President Putin announced yesterday that payments for fossil gas shipments to Europe would now have to be made in Russian rubles.

The price of EU gas futures have increased by around 800% in the past year and could rise much higher if Russia reduces or stops supplies. With Europe depending on Russia for 40% of its gas supplies and the war in Ukraine showing no signs of ending, fossil energy price inflation and volatility is likely to continue as price shocks are felt throughout the contractual chain.

Fossil fuel price changes have resulted in large variations in margin calls to energy and commodity firms using futures to hedge their physical positions, with clearing banks particularly exposed to resulting defaults. “EFET member companies, on behalf of EFET and other involved associations, have been engaged with parties who may be able to help in setting up liquidity facilities since March 9,” said EFET executive vice-chair Peter Styles. “This engagement continues as of today.”

As EFET members call for targeted assistance to keep Europe’s fossil energy market functioning, thinktanks and civil society groups seek similar measures from the ECB to rapidly reduce EU dependence on all fossil fuels.

Positive Money EU has called on the ECB to facilitate bank credit for energy efficiency through targeted lending for home retrofits and other demand reduction measures, while the New Economics Foundation has recommended that the ECB use its policies to “actively steer credit towards a rapid green transition”.

Reclaim Finance economist Paul Schreiber also called on the ECB to directly support the EU in moving away from fossil fuels. “The energy price crisis amplified by the dramatic war on Ukraine serves as a painful reminder that Europe cannot truly control inflation without controlling its energy supply,” he said. “Taking stock of this reality, the ECB must support the EU’s efforts to improve energy efficiency and develop renewable energies.”

Speaking in Frankfurt last week, president Christine Lagarde said the ECB will keep its options open and will act carefully in response to the developing situation while also being flexible. “We are ready to use a wide range of instruments to address the ‘financial fragmentation’ caused by the uneven effects of the crisis,” she said, specifically referring to the reinvestment of the ECB’s pandemic emergency purchase programme portfolio.

This page was last updated March 24, 2022

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