ESMA finds high degree of concentration in natural gas derivatives markets

ESMA has released a study on the structure and functioning of EU natural gas derivatives markets, highlighting potential risks to financial stability.
The study found that the annual turnover of natural gas derivatives on EU futures exchanges reached EUR 4,150bn in 2022, and open positions of EU counterparties amounted to around EUR 500bn at the end of 2022. 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. In that context, liquidity and concentration risks are among the main vulnerabilities identified, along with data fragmentation and gaps.
The study also raised concerns about the recent migration of some of the activity from exchange-traded to OTC derivatives trading, which may be related to lower margin requirements. The shift towards OTC trading raises concerns due to more limited transparency and more bespoke margin and collateral requirements in that market segment. Furthermore, the market is vulnerable to data gaps and fragmentation, which could negatively impact transparency and risk management practices.
Natural gas derivative markets have become increasingly important, particularly after the Russian invasion of Ukraine, which led to a significant deterioration of liquidity and increased volatility in the markets. The study complements other analyses published in recent months (eventid=19975) and aims to provide an overview of the structure and functioning of EU natural gas derivatives markets.