EU's gas price cap scheme could backfire

Proposed European Union rules aimed at tempering natural gas price spikes may actually jeopardize financial stability and need to be redesigned, the European Central Bank said in a formal opinion.

The EU proposed a "market correction mechanism" last month aimed at tempering natural gas prices and market volatility after a spike in energy costs pushed inflation to record highs and raised financial market stress in energy derivatives trading.

The ECB, a guardian of the bloc's financial stability, acknowledged that the goal was to moderate extreme price levels and volatility, but warned that the rules could achieve the exact opposite.

"The ECB considers that the current design of the proposed market correction mechanism may, in some circumstances, jeopardise financial stability in the euro area," the ECB said an opinion signed by President Christine Lagarde.

"The mechanism's current design may increase volatility and related margin calls, challenge central counterparties' ability to manage financial risks, and may also incentivise migration from trading venues to the non-centrally cleared over-the-counter market," it added.

The ECB also asked the European Commission to curb its role in the process of activating and ending the price mechanism as the current proposal may encroach on its independence and confer a new task on the bank without a necessary EU Treaty change, all the while other agencies may be better suited for the role.

Instead, the EU should merely have the "possibility" to seek the ECB's advice, the ECB added.

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