Volatility safeguards and other price determination safeguards are implemented at EEX' markets in accordance with MiFID II as well as the German Exchange Act. In this regard, it is necessary to distinguish, in particular, between the automatic volatility interruption mechanism and the temporary market suspension, which falls under the discretion of the Management Board of the Exchange.
a. Automatic volatility interruption mechanism
After the go-live of MiFID II in 2018, EEX implemented automatic volatility interruptions as a circuit breaker functionality in accordance with section 24(2b) German Exchange Act, implementing Art. 48 (5) MiFID II. These are meant to diminish the likelihood and extent of short-term price spikes or aberrant market moves and aims at giving market participants time to evaluate the information that is causing price change.
The trigger for a volatility interruption in the central limit order book is a significant price movement in a continuously traded derivative or spot contract (with the exception of natural gas spot contracts, see below). The exchange determines dynamic ranges within which prices may go up or down (price difference parameter) within a certain timeframe (time difference parameter) in a specific contract (e.g. German Power Base Year). If the next expected execution price, with respect to a specific time frame, is outside a specific price range:
- The market is temporarily halted. All non-persistent orders will be automatically deleted by the derivatives trading System T7.
- Immediately afterwards, a pre-trading period will be triggered where visible orders can be entered into or changed in the trading system but without immediate matching. During this period, only prices of orders (not the quantity) are visible and in case of a potential matching, the market price (indicative and non-tradable price) is displayed.
- Markets are set to continuous trading again as soon as reasonably possible. With regard to EEX Natural Gas Futures (including EEX EGSI Futures) and EEX Power Futures, a halting period of at least 5 minutes will apply as of 13 February 2023.
The volatility interruption mechanism prevents large price swings regardless of the direction in which the market is moving. It allows the market operations department as well as market participants to assess the situation calmly during a hectic market phase.
The exact parameters take into account the liquidity in each contract. EEX does not publish the parameters of the volatility interruption mechanism to prevent misuse.
In accordance with Article 15(6) of Regulation (EU) 2022/2576, EEX has implemented the so-called intra-day volatility management mechanism by integrating it into its existing circuit breakers already established in accordance with Directive 2014/65/EU, which are described above.
b. Price deviation control mechanism for Natural Gas Spot Contracts
With regard natural gas spot contracts, no automatic volatility interruption mechanism applies. EEX has implemented a price deviation control mechanism. More specifically, EEX determines dynamic ranges within which prices of orders may go up or down (price difference parameter) within a certain timeframe (time difference parameter) in a specific contract. Orders outside these ranges do not trigger an automatic volatility interruption but are rejected. A potential market halt is left to the discretionary market suspension mechanism described below.
c. Trade Registration Price Ranges
Trade Registration is not subject to the volatility interruption mechanism implemented at EEX as described above. However, EEX has implemented so-called Trade Registration Price Ranges with regard to the permitted entry price (Section 11 of EEX Trade Registration Rules).
d. Market Suspension
The Management Board of the Exchange, who is subject to legal supervision of the exchange supervisory authority (Saxon State Ministry for Economic Affairs, Labor and Transport) could decide to temporarily suspend trade execution of all derivatives and spot markets and set the markets into Pre-Trading Period. Similar to the automatic volatility interruption mechanism, during this period only prices of orders (not the quantity) are visible and in case of a potential matching also the market price is displayed.
Such a potential suspension would be based on the full consideration of all market conditions by the Management Board of the Exchange. More information can be found in our Q&A on potential EEX Derivatives Markets Suspension.