ESMA finds adequate setup of measures to reduce volatility in trading of energy derivatives

ESMA has conducted an assessment of the IVM implemented by trading venues for energy derivatives trading. The IVMs are designed to reduce extreme price volatility within a single trading day.
ESMA’s assessment includes an evaluation of the calibration of the IVMs and their effectiveness in managing volatility. The report acknowledges that the assessment was conducted during a period without evidence of prolonged volatility episodes affecting energy commodity derivatives trading. Nonetheless, ESMA believes that the IVMs are adequately calibrated. However, the report highlights significant practical challenges in implementing the IVMs for illiquid trading venues.
In addition to evaluating the IVMs, ESMA has compared them with existing circuit breakers under MiFID II. Circuit breakers are mechanisms that temporarily halt or constrain trading in the event of significant price movements. ESMA has identified significant practical challenges in implementing the IVMs for illiquid trading venues, suggesting that the existing circuit breakers under MiFID II may be sufficient to manage excessive intra-day price volatility. ESMA is working on issuing further guidance in the second half of 2023 to ensure the appropriate implementation and application of circuit breakers by trading venues under MiFID II.
The report fulfills ESMA’s mandate under the EU Regulation, which requires an assessment of the implemented IVMs. ESMA will continue to request updates on the implemented IVMs from trading venues on a quarterly basis and monitor developments in the trading of energy commodity derivatives. The report provides insights into the state of play regarding the implementation of IVMs, highlights their customizability based on liquidity and volatility considerations, and offers recommendations for managing price volatility in energy derivatives markets.