The Business Times

UK sets up £40b fund for energy traders as markets strain

Published Thu, Sep 8, 2022 · 09:08 PM

The UK Treasury and Bank of England launched a £40 billion (S$64.7 billion) fund to provide energy traders liquidity to deal with massive margin calls, joining a list of European states taking dramatic action to prevent the energy crisis becoming a “Lehman” moment.

The so-called Energy Markets Financing Scheme will provide stability for energy and financial markets, and help cut costs for consumers, the government said as Prime Minister Liz Truss unveiled a broader energy package. Denmark also moved on Thursday (Sep 8) to shore up power companies with a US$13.5 billion package, as the government said firms otherwise risk going under. 

Policy makers across Europe are racing to stem the financial risks posed by the energy crisis, as surging prices prompt ballooning calls for collateral for energy trades. Nordic governments stepped in at the weekend, saying that if they didn’t, the spillover could provoke a “Lehman Brothers” event. 

European energy ministers meet on Friday and similar steps are set to be discussed, as companies are crying out for help finding the extra cash they need to guarantee trades when market prices jump. Energy company Equinor ASA has said that the industry’s margin calls amount to at least US$1.5 trillion.

Bank of England Governor Andrew Bailey on Wednesday told lawmakers that the issue was causing “strain” in the energy markets that may thin out trading.

European policy makers are also examining measures such as credit lines from the European Central Bank, new products as margin collateral, and temporary suspensions of derivatives markets, according to a policy background paper seen by Bloomberg News. 

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Increased collateral requirements have been an issue for traders for months but the situation stepped up a gear this week after Russia moved to cut off gas through its crucial Nord Stream pipeline on Friday.

After the Nordics’ move, Switzerland then granted Axpo a credit line of up to US$4.1 billion. The company, which produces and trades renewable energy, asked for the credit line but hasn’t used it yet. Germany is also providing backstops.  

In the case of the UK, the programme will provide short-term support and will be used as a last resort, the government said. BLOOMBERG

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