Factbox: Margin calls in the spotlight in the turmoil of the energy market in Europe

Flames from a gas burner are reflected on a stove in a private house in Bad Honnef near Bonn, Germany, October 11, 2021. REUTERS / Wolfgang Rattay

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Jan. 11 (Reuters) – Soaring electricity prices rocked energy companies across Europe, forcing Germany’s Uniper (UN01.DE) to secure credit lines of up to $ 11 billion last week .

RWE, another of Germany’s largest utilities, said it had also built up credit provisions. Read more

On Tuesday, his German colleague STEAG said he had secured at least 100 million euros ($ 113 million) in additional funding to protect him from soaring prices and market volatility. Read more

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The surge in European prices, up 250%, left some companies at risk, forcing them to deposit additional funds to cover payments related to hedges, known as margin calls.

Margin calls arise when the gap between ‘spot’ electricity prices and the level at which utilities have sold their forward generation becomes too large, forcing them to display the margin as evidence that they can deliver. in the unlikely event of a fault.

On delivery, these contracts are usually unwound and the money goes back to the utilities, which is business as usual as long as the price fluctuations aren’t too great.

However, recent volatility has changed this dynamic, leading utilities to seek more financial leeway. Read more

Below is an overview of how margin calls work:

– The wholesale and commodity trading markets for gas, electricity, coal, petroleum and its products regularly require down payments from operators to cover open liabilities, which increase in the event of fluctuations without previous.

– Selling future production in advance requires paying buyers a deposit in case the producer cannot deliver. Once the offer is received, the producer gets his money back.

– When prices double, triple or quadruple like in recent weeks, forward shipments increase in value and must be secured with more cash.

– Independent trading companies, brokers and producers’ trading rooms also speculate on production, export and import, for example by selling short positions with a view to subsequent buyback, at lower cost.

– Margin payments can be waived in bilateral and confidential agreements when partners feel they are immune to counterparty risks.

– When companies optimize their hedging measures, they regularly seek to use cross-margin and netting opportunities to limit overheads and exposures.

– In fact, borrowing money to finance the margin involves the payment of interest and involves expenses that companies do not then have to devote to other areas of investment.

– Europe’s energy crisis has been more manageable for industry leaders with larger reserves, whose profits are also expected to benefit greatly from higher incomes from rising prices.

($ 1 = € 0.8821)

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Reporting by Vera Eckert and Julia Payne; Editing by Alexander Smith

Our Standards: Thomson Reuters Trust Principles.

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