European Commission eases rules for traders, state may guarantee instead of cash collateral

At the end of last week, the European Commission extended and amended the rules for providing state aid to energy companies. Among other things, the amended rules affect companies that must provide financial collateral in connection with trading on commodity exchanges. In exceptional cases and under strict conditions, Member States may provide guarantees for the fulfilment of obligations of up to 90 % of the financial commitment instead of cash collateral, where the collateral is required for exchange-traded commodity transactions.

Since the start of the energy crisis, energy companies have faced problems with the financial collateral they are required to post in cash when trading on exchanges. Financial collateral proved to be a major issue during the rapid rise in electricity prices, particularly for electricity producers that had sold their output through futures at low prices several years in advance. As exchange prices subsequently rose, however, they had to post large amounts on the exchange to secure their obligation to deliver electricity at the agreed price.

Some Member States also had to respond to this situation by providing loans to energy companies. Germany's Uniper was among the first to have to request state aid due to high margin calls. Companies across the European Union and the Czech Republic faced problems with insufficient liquidity precisely because of financial collateral requirements. Czech utility ČEZ, as well as EPH and Sev.en energy, also received state loans for this purpose.

"In exceptional cases and under strict conditions, Member States may provide a guarantee exceeding 90 % of the amount, where such guarantees are provided as financial collateral to central counterparties or clearing members," the European Commission said in a statement.

The European Commission is now introducing a solution intended to help address this situation. Under the new rules, EU governments could provide financial guarantees exceeding 90 % of the coverage required to meet cash collateral requirements.

For energy companies, this represents a fundamental change. In the event of price volatility on the exchange, they would not need to secure additional liquidity in the form of loans; a state guarantee would suffice. If an obligation secured by the guarantee were not fulfilled, funds would be drawn under the guarantee rather than from cash collateral.

This would prevent companies from having to allocate a large share of their financial resources on the exchange, which they cannot use until the contract is settled