ECB warns EU gas cap scheme could backfire

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ECB warns EU gas cap scheme could backfire

Gas price cap scheme in the EU could backfire, raise volatility - gas cylinders are stored at a gas vendor shop in Sint-Pieters Leeuw, in a gas vendor shop.

The European Central Bank said on Thursday in a formal opinion that proposed EU rules aimed at tempering natural gas price spikes may jeopardize financial stability and need to be redesigned.

A market correction mechanism was proposed by the EU last month to temper natural gas prices and market volatility after a spike in energy costs pushed inflation to record highs and caused financial market stress in energy derivatives trading.

The goal was to moderate extreme price levels and volatility, but the rules could achieve the exact opposite, according to the ECB, a guardian of the bloc's financial stability.

The European Central Bank said in an opinion signed by President Christine Lagarde that the current design of the proposed market correction mechanism may jeopardise financial stability in the euro area.

It said that the mechanism's design may increase volatility and related margin calls, challenge central counterparties' ability to manage financial risks, and may encourage a migration from trading venues to the non-centrally cleared over-the- counter market.

The European Commission was asked by the European Central Bank to halt its role in the process of activating and ending the price mechanism because the current proposal may encroach on its independence and cause a new task on the bank without a necessary EU treaty change, all while other agencies may be better suited for the job.

The EU should have the chance to seek the advice of the European Central Bank, according to the ECB.