By Kate Abnett
BRUSSELS, Dec 6 (Reuters) - An exchanges operator has warned the European Union that its proposal to cap gas prices would make it more likely that prices rise to hit the cap, according to a document seen by Reuters.
The European Commission last month proposed a cap that would kick in if the front-month price on the Dutch Title Transfer Facility (TTF) gas hub exceeded 275 euros ($288) per megawatt-hour for two weeks, and was 58 euros higher than a liquefied natural gas reference price for 10 days.
In a memo sent to the Commission, the Intercontinental Exchange (ICE) - which hosts TTF trading - said that proposal could in fact drive prices higher, despite it being designed to cushion EU countries' economies from gas price spikes.
The memo, seen by Reuters, said liquidity providers were likely to buy back short positions and stop selling TTF gas futures if prices climbed to even relatively near the cap level, to cover themselves against the risk of holding those positions when the cap was triggered - a situation in which they would face "no certainty about what they are trading and what their risk is".
The resulting shortage of sellers in the TTF market would drive up prices, it said.
"Our customer outreach and internal risk assessment suggest that the mere presence of a cap, significantly increases the probability of the cap being triggered," the memo said.
The European Commission declined to comment on the memo.
EU energy commissioner Kadri Simson held a videocall on Tuesday with representatives from energy exchanges to discuss the cap, after the Association of European Energy Exchanges last week warned of potential negative consequences.
"The EU Commission hears the concerns and arguments expressed by the representatives of the European Gas Exchanges. We are aware of them. This is why the proposal includes strong safeguards," Simson said in a tweet.
The safeguards include that the Commission could immediately suspend the price cap if it caused negative consequences, including risks to financial stability or gas flows within Europe.
The TTF is the most liquid gas futures market in Europe, attracting a wide range of gas suppliers, wholesalers and speculators
EU countries are negotiating the planned cap, but remain divided over it. Some EU diplomats are sceptical a deal would be reached at a Dec. 13 meeting of energy ministers.
ICE warned the EU proposal could also lead to an 80% increase in the security deposits that gas market participants are required to put down to guarantee their trades in case of default.
"An increase of this size could destabilise the market," the memo said.
($1 = 0.9537 euros) (Reporting by Kate Abnett Additional reporting by Marwa Rashad Editing by Mark Potter)