UK, BOE Set Up £40 Billion Liquidity Fund for Energy Traders

(Bloomberg) -- The UK Treasury is setting up a £40 billion fund with the Bank of England to help energy companies access extra liquidity they need to deal with surging energy prices.

The so-called Energy Markets Financing Scheme will provide stability for energy and financial markets, the economy and help cut costs for consumers, the government said in its energy plan announced by Prime Minister Liz Truss on Thursday.

There are similar concerns in Europe, with plans to take steps to ease the mounting stress in energy markets caused by surging collateral requirements. Companies are crying out for help finding the extra cash they need to guarantee trades when market prices jump.

Bank of England Governor Andrew Bailey on Wednesday told lawmakers that the issue was causing “strain” in the energy markets that may thin out trading.

The UK program will provide short-term support and will be used as a last resort, the government said.

The situation for energy companies worsened at the end of last week, when natural gas prices surged 37% after Russia stopped flows of gas to Europe indefinitely. 

Norway’s Equinor ASA has said that European energy trading risks collapsing under the weight of margin calls amounting to at least $1.5 trillion. 

The UK’s biggest supplier, Centrica Plc, is in talks with banks on the potential extension of credit lines, according to a person familiar with the matter. 

The European Commission is also examining measures that could include credit lines from the European Central Bank, new products as margin collateral, and temporary suspensions of derivatives markets, according to a policy background paper seen by Bloomberg News. 

(Updates with scale of program in first paragraph.)

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