Brussels ignores derivatives at its peril amid energy crisis

Financial Times ^ | 09/08/2022 | GILLIAN TETT

[aimhigh]

When European leaders meet in Brussels on Friday to tackle the continent’s energy crisis, politicians will be focused on windfall taxes and energy price caps. And no wonder: spiralling electricity costs are creating mounting pain for households and businesses — and political upheaval. However, investors should keep an eye on another item on the agenda: their approach to energy derivatives markets, clearing houses and exchanges. This might seem arcane but the issues now bubbling in the derivatives sphere represent another potential time bomb for Europe — one that needs to be urgently addressed.

[ComputerGuy]

Ah, derivatives.

[JonPreston]

I’m Dreaming of a White Christmas along with a White January, February and March 😃

[Worldtraveler once upon a time]

--- "This might seem arcane but the issues now bubbling in the derivatives sphere represent another potential time bomb for Europe — one that needs to be urgently addressed."

This is in no way arcane.

Industrial capitalism invests in the making of things for others and builds a society. Financial capitalism merely pushes capital around, making nothing in the process, and as such can tear down society. Buyouts to strip companies of assets such as retirement funds is a perfect example of the latter. Europe and the US need to return to greater emphasis on industrial capitalism, and reign in financial capitalism before that "casino" of gambling -- derivatives -- simply pops.

[353FMG]

Europeans are already discussing how they will divide the spoils that the US will dole out and how they can screw the US out of more money and/or LNG. They are like college girls depending on a sugar daddy.

[zeestephen]

Link is behind FT pay wall.

Can someone summarize the issue?

My guess - most energy related derivatives ultimately require the physical delivery of the energy product by a certain date.

My guess - since Putin has shut off natural gas to Europe, there will be no product to deliver on derivative expiration dates, which essentially means that billions of dollars of underlying derivatives are completely worthless.

Energy derivatives are not just a gamblers paradise.

They are legitimately used by thousands of companies that must hedge against the price volatility of energy products.

Thanks in advance to anyone with a Financial Times subscription!

[hinckley buzzard]

Futures markets are used by hedgers and speculators who improve the efficiency and liquidity of markets. But they don’t control everything so sometimes events overtake them, just like in the securities markets.

[fella]

Meanwhile the Brits are going to “Drill Baby Drill”.

[RossA]

I know of one natural gas supplier to Europe that is planning on defaulting its contracts to deliver at $4/mmbtu, pay the contracted penalty, and resell at $50. What then happens to the EU utility that has budgeted purchases at $4 and is obligated to deliver at, say, $4.50? Sing along with me:

B A N K R U P T C Y, why do I have Bankruptcy?

[citizen]

What I want to know is, in one way or another - or maybe in multiple ways - is the US FED going to bail out the Euros and their energy entities by giving them how much? A trillion? More?