Intercontinental Exchange plans to accept allowances generated by the €1tn carbon market as collateral in its European futures venue, in an effort to relieve pressure on utilities and traders hit by the region’s energy crisis.
Ice Clear Europe is consulting with members about accepting allowances for companies wanting to hedge against or bet on the price of carbon falling, according to a circular published late on Monday.
It follows a push from authorities and exchanges to find flexibility within the market to ease the burden on stretched energy companies using futures and struggling with volatile price moves.
The cost of buying and selling gas, electricity and power has fluctuated wildly since Russia’s invasion of Ukraine and been exacerbated by water droughts across the continent.
Utilities that have hedged their power sales — often months or years in advance — on futures markets and must make regular margin payments to clearing houses to insure those deals. A clearer sits between buyer and seller to prevent a default from infecting the rest of the market.
But clearing houses typically demand assets that are very easy to buy and sell like cash or sovereign bonds. The spike in prices has raised costs and meant few energy companies can afford to make the payments. That has created a crisis of market liquidity and forced some governments, like Finland and Germany, to step in.
ICE said it hoped its move would give market participants more options and flexibility “as well as assisting the energy markets with the current liquidity pressures.”
The clearing house aims to free up scarce collateral from the European carbon market, the world’s biggest. Utilities typically hold a surplus of carbon allowances because each year they have to “give up” a certain amount to cover their pollution. However, they can sell the rest on the market for profit. Last year the EU handed out just over 1.5bn allowances.
ICE is asking members if they will accept European carbon allowances as initial margin for traders wanting to cover a potential market fall, as a future and an option. Initial margin is held by clearing houses to cover potential losses from a default.
The tweaks only require a change to the ICE clearing house rule book and can be implemented in two weeks, with regulatory approval.
European authorities have played down their ability to intervene and change legislation for fear of extending financial stability risk to clearing houses.
But the price of carbon has fallen by more than a fifth since the start of the war in Ukraine, to €70 a tonne, in part on fears the EU may flood the market with allowances.
Last year ICE moved trading of carbon emissions from London to Amsterdam in the wake of the UK’s departure from the single market. However, clearing of carbon remained in London.
Traders often trade markets like gas, crude and carbon in conjunction and consolidate their positions at one clearing house, to save themselves millions in additional margin payments.
