ISDA, the Association for Financial Markets in Europe and FIA have published a position paper on the European Commission’s market correction mechanism proposal for natural gas prices in the European Union. The proposed mechanism would set a price cap on the TTF front-month future contract price when certain conditions are met.
The associations urge policymakers to avoid imposing any price cap on the wholesale gas market and instead focus effort on securing supply, reducing demand, supporting the liquidity needs of energy firms and accelerating the energy transition.
The paper highlights the detrimental implications that the proposed mechanism would have on liquidity and risk management, and warns that it would introduce unacceptable levels of systemic and operational risk while not necessarily achieving the primary policy objective to reduce power and gas prices for consumers. The paper also asserts that this measure could undermine trust in the European gas market, discouraging market participant activity.