German Utility Calls for Limits on EU Carbon Market Speculators
(Bloomberg) -- Record gains in European Union pollution prices prompted a German power company to call for the bloc’s financial market regulator to curb the influx of speculative investors into the market.
Stromio GmbH last month contacted the European Securities and Markets Authority about the need for limits on the amount of derivatives related to the EU Emissions Trading System that investors can hold, according to a letter seen by Bloomberg News.
The price of carbon allowances more than doubled over the past year to about 62 euros a ton, partly because of hedge funds building up exposure in expectation of stricter EU climate policies. Some investors expect CO2 prices to surpass 100 euros by year-end, placing a significant financial burden on the companies that need the allowances to comply with EU emission rules.
“In our view, the ESMA should regard EU allowances as a ‘critical’ commodity underpinning the whole energy complex across Europe,” Stromio’s managing director Omer Varol said in the letter dated Aug. 10. “Reasonable and enforceable position limits on EUA futures and options should be introduced to constrain trading participants from taking extreme positions.”
He also raised concerns about possible insider trading and market abuse practices in the EU carbon market.
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Under the current EU law, derivatives on emissions allowances are exempted from the position-limit regime. Any changes would require an amendment to the EU regulations on markets in financial instruments, due for a review later this year.
In a reply to Stromio earlier this month, ESMA said it was ready to pass on the concerns to representatives of the European Commission, the bloc’s regulatory arm. ESMA confirmed it
“The scope of instruments falling under the position limit regime is a political decision and ESMA does not have a legal basis to impose position limits on derivatives on emission allowances on its own initiative,” ESMA told Stromio in an email sent on Sept. 3 and seen by Bloomberg News.
The current exemption for EU carbon permit futures and options in the Markets in Financial Instruments Directive should be lifted as soon as possible, Juan Useros, Stromio’s director of supply and trading, told Bloomberg News on Tuesday.
“Speculative market participants should operate within reasonable position limits to ensure healthy liquidity and a price discovery mechanism while impeding extreme market positioning and market abuse practices,” he said.
The European Commission said on Tuesday it had no comment on the substance of the future review of MIFID at this stage.
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