Cologne (energate) - Companies across the industry are concerned about so-called margin calls. In the summer of 2022, energy suppliers were the first to sound the alarm. Large energy groups such as Wien Energie or the Swiss Axpo needed state guarantees within a very short time. The additional demands for collateral that the companies have to deposit for their trading activities increased daily to an alarming extent.
In the meantime, prices are falling again and exactly what was supposed to be a relief for the industry is now becoming a problem. Armin Komenda, board member of electricity supplier EWS Elektrizitätswerke Schönau, recently said: "We look at the prices every morning and hope they don't fall any further." Collateral is pushing EWS to its limits, and the green electricity supplier from southern Germany is not alone in this (
energate reported).
For which transactions are there securities?
In general, there can be collateral for all trading transactions, whether in futures trading, on the spot market, on the stock exchange or in OTC trading. The classic and also most expensive example is futures market products traded on the exchange.
Why is there collateral?
Collateral is used by trading partners to protect each other against the risk of default even before the energy is delivered. This is because the goods are not paid for until after the physical delivery. If the buyer becomes insolvent, the seller is left with the amount of energy. If the seller goes bankrupt, the buyer does not get the amount of electricity or gas on which he relied.
In exchange trading, the exchange assumes this risk of default. The exchange guarantees everyone who trades there that the transaction will take place exactly as agreed, even if the trading partner defaults. It does not do this free of charge. It has this risk reimbursed by the market participants through collateral. A clearing bank, which every market participant must have, settles the transactions for the exchange.
Who pays collateral to whom?
When the contract is concluded, both buyer and seller deposit collateral. In exchange trading, the collateral must be deposited with the respective clearing bank. In OTC trading, companies settle this among themselves. Buyers are classically municipal utilities or independent energy distributors. Energy producers sell electricity, upstream suppliers such as Uniper or Sefe sell gas.
When must the collateral be paid?
In futures trading, a distinction is made between two different forms of collateral. Directly when the contract is concluded there is the so-called initial margin. It does not stop there. Assuming two traders agreed at the beginning of 2022 to deliver electricity for 2023 at a price of 200 €/MWh and the prices change, the risk fluctuates accordingly. If the price rises to 800 €/MWh, as it did in the summer, and the seller were to go bankrupt, the buyer can no longer get the MWh for 200 euros, but only at a much higher price from another supplier.
In order for the buyer to be able to rely on electricity at a favourable price, the seller deposits more collateral. On the exchange, he has to do this daily and until the delivery date is reached. This leads to the following: When prices rise, the margin calls hit the sellers.
In the opposite example, when prices fall, the buyers have to make additional margin calls. If the two trading partners have concluded a contract at 800 €/MWh and some time later electricity only costs 100 €/MWh, the seller bears a large default risk, which the buyer has to hedge by paying collateral. In OTC trading, customers must deposit further collateral when an individually set trading limit is reached.
How high is the collateral?
The amount of collateral varies according to the type of trade. On the exchange, rules set the parameters for the calculation. Sometimes the initial margin in futures trading is as high as the trade itself. The variation margin to be settled daily fluctuates with the difference to the agreed price. In OTC trading, there are individual agreements between the trading partners. Suppliers have internal and audited risk guidelines for this. In general, the collateral in OTC trading is significantly lower than on the stock exchange.
In what form is collateral to be paid?
Collateral can be either cash payments or guarantees. Guarantees are provided by banks or shareholders, such as a parent company or the city. In addition, a federal state or the federal government itself could also provide a guarantee.
What political instruments have been in place so far?
The German government launched the so-called Margining Programme in 2022. It uses KFW guarantees to support companies that have sold energy via the stock exchange. Previous policies have excluded energy buyers and OTC traders. /kj
