The European Central Bank said in a formal opinion paper on Thursday that the European Union’s plan to cap gas prices, designed to moderate soaring gas prices, could actually endanger financial stability and needed to be redesigned.
Soaring energy costs in the wake of the Russia-Ukraine conflict have pushed euro zone inflation to record highs and added pressure on energy derivatives trading markets. To curb gas price spikes and market volatility, the EU proposed a “market correction mechanism” last month.
The mechanism stipulates that if the natural gas futures price of the Dutch Title Transfer Center (TTF), which is the benchmark price of European natural gas, exceeds 275 euros (288 US dollars) per megawatt-hour for two consecutive weeks, and the TTF price is higher than that for ten consecutive trading days within the above-mentioned two weeks. Above the LNG guide price by €58, the cap level will be triggered.
The ECB, the guardian of financial stability in the euro zone, acknowledged that the goal of price caps was to moderate extreme price levels and volatility, but warned that the rules could backfire.
The opinion paper, signed by ECB President Christine Lagarde, reads:
“The ECB considers that the design of the currently proposed ‘market correction mechanism’ could, under certain circumstances, endanger financial stability in the euro area.”
The submission added that the mechanism could increase volatility, increase trade margin ratios, challenge the ability of central counterparties to manage financial risks, and may also incentivize the transfer of trades to non-centralized cleared over-the-counter markets.
In addition, the ECB also asked the European Commission to limit its role in the process of starting and ending the price mechanism, because the current proposal may infringe on its independence and give the ECB new tasks without the need to amend the EU Treaty, while Other institutions may be better suited to fill this role.
Earlier, Intercontinental Exchange (ICE), the operator of the TTF natural gas futures market in the Netherlands, also stated in a memo to the European Commission that the EU’s proposal to limit natural gas prices would actually make it more likely that prices will rise to the upper limit level and may lead to Natural gas market participants are required to pay an 80% increase in margin. And “margin increases of this magnitude could destabilize the market.”