EU watchdog sees concentration and liquidity risks in gas derivatives

(Reuters) - Europe's $4.5-T natural gas derivatives market has become less transparent since Russia's invasion of Ukraine and faces risks due to a small number of market players and low liquidity, the European Union's securities watchdog said on Friday.

The European Securities and Markets Authority (ESMA) said gas prices soared amid high volatility and a significant deterioration in liquidity following the invasion.

Europe has been weaning itself off Russian natural gas, shifting to other suppliers.

"The market is characterized by a high degree of concentration of market participants active in clearing and trading activity, and some energy firms hold relatively large derivative positions," ESMA said in a study.

Annual turnover on EU futures exchanges reached €4.1 T in 2022, with open positions among EU counterparties totaling around €500 B at the end of 2022.

"The recent migration of some of the activity from exchange-traded to over-the counter derivatives trading raises concerns due to more limited transparency and more bespoke margin and collateral requirements in that market segment," ESMA said.

Natural gas faces storage constraints, making prices more dependent on outside factors such as geopolitical events, it said.

"Looking forward, the analysis of risks in natural gas derivatives markets requires further work to address data gaps and data fragmentation. In that context, further cooperation between energy and financial market regulators is warranted."

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