On 29 September 2022, the European Banking Authority (EBA) published its response to the European Commission’s earlier letter asking the European Supervisory Authority for its views on the current level of margins and of excessive volatility in energy derivatives markets.
In summary the EBA states that:
- Banks are already providing significant levels of support to energy firms by facilitating the posting of collateral towards central counterparties (CCPs). This includes the provision of so-called collateral transformation services to their clients.
- In terms of the forms of support, market-based solutions are already in place, typically in the form of higher usage of existing credit lines and expansion of various forms of collateral transformation. Banks have generally indicated that they are highly mindful of their role.
- Bank guarantees are already used, albeit as collateral for clearing members, rather than as collateral for CCPs. Banks can take these guarantees from other banks as collateral in their own support efforts towards energy firms and some limited usage already exists today.
- Toward CCPs, for practical and administrative reasons, bank guarantees however have not been the preferred solution by market participants and rather the use of credit lines is the norm. The EBA notes that the European Securities and Markets Authority may consider to exceptionally expand eligible collateral in CCPs to uncollateralized bank guarantees subject to certain restrictions.
- Banks are facing significant liquidity draws when there are significant market movements. The EBA welcomes efforts to provide more transparency around margin calls.
The EBA’s has also published a fuller response to the Commission.