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Britain offers support to energy traders

The Truss government has been busy trying to right the financial ship after an incredibly rough start.

British Prime Minister Liz Truss is offering backing to energy trading firms who are struggling to back their positions during a time of extraordinary market volatility. File Photo by Hugo Philpott/UPI
British Prime Minister Liz Truss is offering backing to energy trading firms who are struggling to back their positions during a time of extraordinary market volatility. File Photo by Hugo Philpott/UPI | License Photo

Oct. 17 (UPI) -- The British government said Monday it would help cover some of the funding for energy traders to avoid what it sees as a liquidity crisis.

In coordination with the Bank of England, the government said it was working to address the "extraordinary liquidity requirements" for energy firms working in the nation's wholesale natural gas and electricity markets. To achieve that, it's offering a 100% guarantee to commercial banks to provide more lending to energy firms through a so-called Energy Markets Financing Scheme.

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"Energy prices have been high and volatile in recent months," the government explained. "As a result, large amounts of collateral are required to enter into contracts firms use to effectively insure themselves from price fluctuations, or otherwise firms must accept large credit exposures to their counterparties."

High prices translate to a massive amount of capital to back energy trades, which can keep some players on the sidelines. Bloomberg noted that about 30 firms have gone under because of high prices or because a price cap imposed by the Office of Gas and Electricity Markets means traders need to take a loss in some cases.

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Eligibility requirements are strict. Firms must be licensed by OFGEM to prove they're in "sound financial health" and be able to show they're making a "material contribution" to the British energy sector.

"Eligible firms who wish to apply for a guarantee will be required to comply with a set of policy conditions, such as restrictions on executive pay and capital distributions," the government added.

Financial institutes, state-owned entities and major brokerage houses are not eligible for the program.

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The Bank of England added that much of the blame lies with Russia and its invasion of Ukraine, which created heightened volatility in the wholesale energy markets. For natural gas alone, the bank said prices have been changing by more than 15% a day.

The move comes as the British government tries to fix the damage caused by a "mini-budget" proposal that included steep tax cuts. That sent the British financial sector into a tailspin, with the pound dropping to $1.03 against the U.S. dollar last month.

The British pound continued to bounce back on Monday, days after Prime Minister Liz Truss dumped Chancellor Kwasi Kwarteng in favor of Jeremy Hunt. Hunt said he's now killing off most of the tax cut proposals initially embraced by Truss.

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