Blog: Esma cautions on bank guarantees as collateral – Montel

Extending eligible collateral to such guarantees could jeopardise financial stability, Esma said in its formal response late Thursday to the EC’s request for advice on how to help companies facing huge margin calls as energy prices skyrocket.

This was because of “the heightened risks and the significant uncertainties linked to their use”, it said.

Esma recommended imposing strict conditions to mitigate these risks, including only allowing such guarantees to be available to non-financial companies and for a defined time period, such as the coming winter.

Central clearing counterparties should also set limits for these non-publicly backed bank guarantees so that they represented only a small share of the total amount of the initial margin requirement for a non-financial company, it said.

Esma said it could consider formally clarifying that publicly-backed bank guarantees could be used as collateral, given their low credit risk.

The Nordic Association of Electricity Traders viewed being able to use bank guarantees as collateral as a “very positive” move, it said on Thursday.

Slumping exchange liquidity

Soaring power prices prompted by the fallout from the Ukraine war are pushing up margin calls, deterring traders from exchanges and promoting bilateral trades.

Previously, bank guarantees allowed power producers to use their physical production as collateral for financial trades instead of cash. But the EU financial regulation Emir abolished the use of non-fully backed bank guarantees in the power and gas sectors from March 2016.

Some market participants said the absence of bank guarantees had increased costs for hedging and contributed to a steady decline in financial power trading volumes in the Nordic region, which hit a 23-year low last year and were down a whopping 56% in 2022 to date.

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