ESMA announced yesterday that they will not extend the carve out which allows non collateralised bank guarantees to be used to cover cleared energy derivatives. The announcement can be found here.

Allowing a smaller set of collateral types, for example cash, may make it harder for some to participate in certain markets. For example, the ability to use bank guarantees has been said to be responsible for a high clearing rate in the Nordic region, which has been reported previously.

It is likely that collateral requirements will increase over the next years. Those who lose their exemption under MiFID will become Financial Counterparties, and will be subject to mandatory clearing, as well as CRD IV. Those who remain outside of MiFID may still find themselves becoming “NFC+” under EMIR, if the hedge exemption is removed as proposed in ESMA’s response to the EMIR review.

It remains to be seen what impact this change will have on market liquidity. We can expect a higher focus on capital optimisation over the coming years as the new environment takes shape.