Should the ‘market making’ obligation be suspended?

Ofgem wants industry views on whether to suspend the obligation on major energy companies to ‘market make’ – ie guarantee to offer prices to companies seeking to buy or sell power in the marketplace.

Ofgem had already begin to review market-making alongside other options for increasing liquidity required under its ‘Secure and Promote’ measures. But market developments have overtaken the review.

Ofgem said, “While the current criteria used for selecting obligated licensees initially captured the six largest vertically integrated suppliers dominant at the time, two of these companies have now divested much of their generation portfolios. Meanwhile, others are taking steps towards consolidation and amalgamation and there is a growing number of smaller scale suppliers active in the market.” It now plans a wider review and it wants to know whether market-making should be suspended until that review is complete in 2019.

Market-making applies in two two-hour ‘windows’. Some companies say it has improved liquidity, because traders are sure to find a counterparty at those times. Others say it has driven much of the trading into those windows, so although  it has cut liquidity at other times – an issue that has become more important as the market has become more volatile with short-term price spikes.

The regulator wants responses by 20 September.

Read the open letter

Further reading

Secure and Promote – Is the liquidity fix in good shape for the future?

Wholesale market liquidity: ‘Please come back bankers: all is forgiven’

Letter: How much can liquidity measures achieve?

 

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