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26 March 2015
Lord Jonathan Hill
European Commission
Rue de la Loi, 200
B-1049 Brussels
Belgium
Email: [email protected]
Dear Commissioner Hill,
An effective regulatory regime for the use of bank guarantees as collateral by non-financial
counterparties is needed to maintain and develop efficient and resilient European power markets.
Representatives from various European power markets reiterate the need to ensure an effective regime
for the use of bank guarantee as collateral by non-financial counterparties beyond March 2016.
Currently, non-financials may use bank guarantees as collateral for CCP clearing of power and gas
derivatives, without the guarantees being fully backed. However, in March 2016 a requirement for full
backing will kick in. This hinders non-financials’ hedging of contracts beyond March 2016 and poses a
huge risk that already well-developed regional power markets disappear and the opportunity to further
develop and integrate the European energy market are significantly negatively impacted.
As a preferred solution, we propose to allow bank guarantees without full backing, by not maintaining
section 2.1, point h) in Annex 1 in Regulation No 153/2013 (the EMIR ‘Implementation Act’).
We emphasise the need to find a solution as soon as possible. We urge the Commission to use its powers
and change this provision and allow non-financials to use non-fully backed bank guarantees as collateral
also after March 2016. Preferably, the solution should be permanent. However, alternatively, the three
year phase-in period allowed in article 62 in the Implementation Act could be extended, allowing time
for further analysis on how to find a permanent solution. We note that the planned EMIR review
______________________________________________________________________________________________
CC: Roberto Gualtieri, Chairman of ECON Committee, and Jānis Reirs, Minister of Finance in Latvia
provides an opportunity to revisit the issue. In this case we insist that the Commission includes the issue
of bank guarantees in the review.
Article 46 of EMIR allows the use of bank guarantees as collateral by non-financial clearing members.
However, the requirement in the EMIR Implementation Act for full backing, in practice negates the use
of bank guarantees. Such a requirement is not in line with the EMIR Level 1 text which does not require
non-financial clearing members to post further collateral in addition to a bank guarantee. The three year
grace period allowed for power and gas in Article 62 of the EMIR Implementation Act, does not remedy
the deficiency.
Already well developed regional power markets face a serious risk of reduced liquidity and transparency
with the prohibition of non-fully backed bank guarantees as collateral. Non-financial counterparties will
face a significant yearly cost increases. In the Nordics, it has been estimated a minimum of 110 million
euros yearly. They are likely to withdraw from the market and revert to more bilateral trading outside
transparent and supervised venues and outside CCP clearing. It may increase market concentration, lead
to less competition and ultimately to lower the social welfare gains. Such a development would clearly
contradict the G20 objectives to create more transparent and resilient derivative markets. The reduced
efficiency will ultimately lead to higher energy bills for consumers.
In the markets where the bank guarantee model is used, it has attracted a high, stable and diverse
number of market participants, financials as well as non-financials, all contributing to market liquidity. It
has led to a sound competition, benefiting the market as a whole, including the end users and
consumers. For these reasons, for instance the Nordic power market has been used as a model for
European legislation such as the Regulation on Energy Market Integrity and Transparency (REMIT).
Disallowing the use of bank guarantees would risk reversing the positive developments and the
opportunity to further develop and integrate the European energy market are lost.
The acceptance of bank guarantees as collateral for non-financials is, and rightly so, subject to strict
regulation. EMIR includes such strict risk management requirements for CCPs, which are absolutely
crucial, and there are capital adequacy requirements for the issuing bank. It may in addition be
recognized that when looking at the whole financial system, the non-financial companies in the energy
sector do not have systemic importance. Further, it is important to recognise the fundamental function
of bank guarantees as reflecting invested capital into production facilities (no bank will issue a bank
guaranty without any ‘substance’ behind the non-financial company in question).
Requiring fully backed bank guarantees from the energy sector is therefore an unreasonable and
disproportionate response to the risk exposure. The exchange traded derivatives are an essential part of
non-financials participants’ financial risk management (hedging). Fundamental players usually hedge
their long term power production and consumption several years ahead. Consequently, an anticipated
prohibition of non-fully backed bank guarantees as from March 2016 contributes to uncertainty and
affects the trading and clearing behavior, especially the commitment to enter into long term contracts
from 2016 and further out on the curve. Therefore, it is a matter of great importance to the market
participants to have clarity as soon as possible, in order to prevent the negative market shift as described
above.
Nasdaq Commodities is the most liquid financial power exchange in the world. The market’s
success is largely down to its superior transparency, liquidity, and efficiency. Nasdaq Commodities
offers cash-settled derivatives contracts in the Nordic, German, Dutch, and UK power markets with
futures, DS Futures, options and EPAD-contracts of up to ten years’ duration. The clearinghouse
provides clearing of all the contracts traded on the Nordic power exchange, as well as standardised
contracts reported for clearing from the over-the-counter (OTC) market.
The Finnish Energy Industries (ET) is a sector organisation for the industrial and labour market
policy of the energy sector. It represents companies that produce, acquire, transmit and sell
electricity, district heat and district cooling and offer related services. ET promotes the
competitiveness of Finnish industry, citizens’ well-being and the reputation of the sector by taking
part in the development of the energy market and safeguarding the availability of sufficient and
disturbance-free energy to households and industry.
Confederation of Finnish Industries (EK) is the leading business organization in Finland. Our main
task is to make Finland an internationally attractive and competitive business environment.
Successful business activities are the foundation for the Finnish welfare society. We represent and
defend the interests of the Finnish business community – both on the national level, as well as in
the EU. EK represents the entire private sector and companies of all sizes: 27 member associations
and 16,000 member companies across all business sectors. Member companies employ 980,000
workers.
Energy Norway is a non-profit industry organization representing about 270 companies involved in
the production, distribution and trading of electricity in Norway. Energy Norway's members each
year produce nearly 130 TWh, which is some 99 per cent of all power production in Norway. Our
members have approximately 2.5 million grid customers, which is about 91 per cent of Norway`s
grid customers".
Swedenergy is an electricity industry association of 169 member groups and about 380 companies.
We represent electricity producers, distributors and traders. Swedenergy monitor, analyze and
influence public policy at EU and national level by providing expertise and developing reports.
Swedenergy’s mandate is to promote a political holistic view of the energy market and to improve
the understanding of electricity's important role in social development and the sustainable society.
Further, it is important for us that the regulation makes it easy and good for today and tomorrow's
electricity customers.
OMIP runs the Iberian energy derivatives exchange since July 2006, providing exchange trading,
and data distribution services for Spanish and Portuguese power derivatives market supported by
state-of-the-art systems. Besides the continuous derivatives Market, OMIP runs several types of
energy auctions for Portugal and Spain. OMIP has currently 59 trading members which can trade
both Spanish and Portuguese futures, base load and peak load, with financial or physical delivery,
options and Financial transmission rights (FTR) between Portugal and Spain.
OMIClear runs the Iberian energy clearing house, central counterparty and settlement system,
since July 2006, based on state-of-the-art systems. OMIClear clears exchange trades coming from
OMIP as well as OTC deals for several types of instruments: futures, swap, forward and options
power trades, for Spain and Portugal, covering all sets of maturities, baseload or peakload, with
financial or physical delivery and Financial transmission rights (FTR) between Portugal and Spain.
OMIClear has currently 18 clearing members, 7 financial settlement agents and 18 physical
settlement agents from 6 European countries and the USA. OMIClear is an authorized CCP in
accordance with the European Market Infrastructure Regulation (EMIR).
Warsaw Commodity Clearing House is a dynamic clearing house, rapidly growing in the area of
energy products clearing and is in the process of expansion into the financial market instruments.
IRGiT is licensed by the Polish Financial Supervision Authority for clearing financial instruments, as
well as for clearing and settling commodities. IRGiT has currently sixty direct members. It clears
and settles all transactions executed on Polish Power Exchange. IRGiT is a part of Warsaw Stock
Exchange Capital Group.
Oberoende Elhandlare (Independent Electricity Retailers) is a Swedish organization for retailers
who actively hedge and trade, as well as energy brokers who hedge on behalf of retailers,
producers and end-users.The members are independent of the vertically integrated oligopoly firms
that dominate the electricity market. The organization aims to safeguard the free market and
create better conditions for competition, both at national, Nordic and European levels.
The Nordic Association of Electricity Traders (NAET) is a non-profit organization
established in
1996 by companies active in the Nordic Power Market. Our mission is “to make the world’s best
power market better”. NAET has over 50 member companies representing different kinds of
market players such as power producers, distributors, industrial companies and financial
institutions. NAET’s focus is on two key issues; liquidity and transparency on the Nordic Power
Market.
Nord Pool Spot operates Europe’s leading power markets, offering both day-ahead and intraday
trading to its members. 370 companies from 20 countries trade on Nord Pool Spot’s markets in the
Nordic and Baltic regions, and on our UK market N2EX. In 2013 the group had a total turnover of
493 TWh traded power. Our markets are operated from offices in Oslo, Stockholm, Helsinki,
Copenhagen, Tallinn and London. Nord Pool Spot AS is owned by the Nordic and Baltic
transmission system operators.
The Danish Energy Association is a commercial and professional organisation for Danish energy
companies. The Danish Energy Association takes care of its member companies’ interests and thus
works to improve conditions and competition among these companies in order to ensure
development, growth and well-being in Denmark.