Emissions Anatomy

EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions →Go uptown Top Trumps®Financial Weapons of Mass Destruction® Emissions Allowance “Wanna stop frying the planet? Start here. Will it help? Who knows? The forward curve is in contango: who cares!” Docs Take your pick: IETA, ISDA or even EFET: none of them good. But at least you have flexibility in mediocrity 4 Amendability Nope. The EU can amend them, but you can’t. 0 Collateral They aren’t anyone’s obligations as such. In fact, they’re more like a sort of unofficial, made up, (hush) crypto. No credit risk! DNA Transferability With an account at the Union Registry, sure! 7 Leverage Not unless you do a CEmO, and we just made that up. 0 Fright-o-meter Not directly scary as long as there is an EU with Greta Thundberg in it, but global warming is going to lead to Armageddon so, you know, indirectly. 5 Index: Click ᐅ to expand: ISDA Emissions TOC EUA Annex - Premium Emissions Pro tip: for tons of information about EU ETS and EU financial services regulation see Michał Głowacki’s magnificent emissions-euets.com website. Emissions trading documentation ISDA: EU Anatomy • EU Wikitext • EU Nutshell (premium) • UK Anatomy • UK Wikitext (to be merged into EU Anatomy) IETA: IETA Master Agreement • IETA Wikitext • IETA Nutshell (premium) EFET: EFET Allowances Appendix • EFET Allowances Wikitext • EFET Nutshell (premium) Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Here is the JC’s latest Anatomy™: ISDA’s emissions annex, which comes in at least two flavours: the original EU Emissions Anatomy, and the new, copycat, we absolutely-are-not-going-through-separation-anxiety, UK Emissions Anatomy. These documents are special in that they are the creature of that permanently marginalised ISDA’s crack drafting squad™ splinter group, the Carbon Squad™. These quasi-fundamentalist drafting weirdos, with all their neo-First Method, “and then I woke up and it was all just a dream” nonsense, don’t often get a look in, but ISDA’s overlords seem to have swtiched off the dash-cams and looked the other way on this occasion, and these bad-boys of carbond have not wasted the opportunity.

For practitioners, this is heady stuff: working out which tracts of the annex are dangerous, extremist nonsense and which are practical allocations of risk in a new and sui generis asset class is an exhilarating, seat-of-the-pants, experience.

The annexes function as sort of add-ons to the 2005 ISDA Commodity Definitions, which you access by adding a new Part with some elections to the Schedule to your ISDA Master Agreement. This is also some cross-grading into the 2006 ISDA Definitions, and you may find yourself hankering wistfully for the dear old 2002 ISDA Equity Derivatives Definitions too, if hedging disruption is something that keeps you awake at night.

Now. In our humble opinion, the level of rigour, diligence and just plain old common sense, however pedantically articulated and tediously applied, we have come to expect when beholding a new weapon from the great ISDA FWMD foundries just feels missing in action for these Emissions Annexes. Oh, fear not: pedantry and tedium abound close-up: ISDA’s crack drafting squad™ knows no boundaries when it comes to labouring what ought to be obvious, and they have spared no innocents here. But back off a few feet to beyond a bigger picture — matters of substance, not form — and you may feel Carbon Squad™ has taken some positions which strike us as being eccentric, were we to put it kindly, and utterly barking mad were we to be speaking candidly among friends.

Seeing as ISDA’s crack drafting squad™ has now duped the original EU version — the UK version is, as you would expect a very close lift — then the original has acquired some inertia. Change one and you much change both. We doubt there will be much appetite. Pity. We don’t quite understand why ISDA didn’t combine these into a single, generic annex. The amount of divergence needed to cover both regimes is very little, and perhaps it was the opportunity to re-visit the original approach and come up with something that sits a little more comfortably with the usual ISDA approach to valuing and terminating derivative transactions.

Now the blame for some of this miscomprehension may well be laid at the JC’s door: we read this cold, without the benefit of having seen its evolution, and without much knowledge of the market, much less competing products (the International Emissions Trading Association’s master agreement, for example). We’ll maybe get on to that. So he may be missing some subtlety.

But we don’t think so: those experts to whom we have spoken are all abut shoulder-shruggy about this document, and sort of mumble that we're struck with it, since a couple of key market participants are now quite attached to it.

It seems the market has taking to amending and adapting the terms of the Annex wholesale, rather than treating it as an inviolable canon, as is usually the ISDA way. So what you are faced with might not much resemble what you find here. But we offer it for what it is worth anyway.

ISDA EUA Annex	EFET Allowances Annex	IETA Master Agreement
Part [•]. EU Emissions Allowance Transactions (a) Scope (b) ISDA Definitions (c) Multiple Delivery Dates (d) Terms (d)(i) Physical Settlement (d)(i)(1) Settlement (d)(i)(2) Delivery (d)(i)(3) Netting (d)(i)(4) Settlement Disruption Event (d)(i)(5) Suspension Event (d)(ii) Failure to Deliver (d)(ii)(1) Failure to Deliver by Delivering Party (d)(ii)(2) Failure to Comply by Receiving Party (d)(ii)(3) EEP Amount (d)(iii) Partial Settlement (d)(iv) Abandonment of Scheme (d)(v) Invoicing (d)(vi) Requirements under the Scheme (d)(vii) No Encumbrances (d)(viii) Value Added Taxes (d)(ix) No Consequential Loss (d)(x) Other Fees and Expenses (d)(xi) Failure to Deliver (Alternative Method) - EEP Applicable (d)(xii) Specified Holding Accounts and Modifications of Party’s Specified Holding Accounts (e) Defined Terms and Interpretation Administrator Event AEUA Allowance or AEU Allowance Affected Allowance Aircraft Operator Allowance Allowance Forward Transaction Allowance Option Transaction Allowances to be Delivered Allowance Purchase Price Allowance Shortfall Allowance Strike Price Allowance Type Appropriate Source Buyer Buy-In Buy-In Period Calculation Agent Call Central Administrator Central European Time Close-out Cost of Carry Amount Close-out Cost of Carry Delay Close-out Cost of Carry Rate Cost of Carry Amount Cost of Carry Delay Cost of Carry Rate Deadline Shortfall Delayed Delivery Date Delayed Payment Date Delivering Party Delivering Party’s Delivery Business Day Location Delivering Party’s Replacement Cost Delivery Business Day Delivery Date Directive DPRC Shortfall EEP Amount EEP Non-delivery EEP Payment EEP Risk Period Encumbrance Loss Amount End of Phase Reconciliation Deadline EU EU Allowance EUTL or European Transaction Log Excess Emissions Penalty/EEP Expiration Date Final Compliance Date Final Delivery Date Fourth Compliance Period Holding Account Indemnifiable EEP Linking Agreement Long-Stop Date LTSL Member State Multiple Exercise National Administrator No Encumbrance Obligation Notice of Exercise Number of Allowances Number of Options Operator Option Option Entitlement Original Affected Party Payment Date Potential Exercise Date Premium Put Receiving Party Receiving Party’s Delivery Business Day Location Receiving Party’s Replacement Cost Reconciliation Deadline Registries Regulation Registry Registry Operation Relevant Authority Relevant Registry RPRC Shortfall Scheme Seller Seller Business Day Settlement Disruption Event Shortfall Specified Compliance Period Specified Holding Account Suspension Event Trade Date Third Compliance Period Unauthorised Transfer Undelivered Allowances Union Registry VAT VAT Amount VAT Invoice VAT Jurisdiction Written Confirmation	I. General Terms § 1 Subject of Allowances Appendix § 2 Definitions and Construction § 3 Concluding and Confirming Allowance Transactions § 4 Primary Obligations for Delivery and Acceptance of Allowances § 4.1 Delivery, Acceptance and Scheduling Obligations § 4.2 Definition of Schedule § 4.3 Physical Settlement Netting § 4.4 Payment for Allowances § 5 Primary Obligations for Options (as per EFET General Agreement) § 6 Delivery, Measurement, Transfer and Risk § 7 Non-Performance Due to Force Majeure and Suspension Event § 8 Remedies for Failure to Transfer or Accept § 9 Suspension of Delivery (as per EFET General Agreement) § 10 Term and Termination Rights § 11 Calculation of the Termination Amount § 12 Limitation of Liability § 13 Invoicing and Payment § 14 VAT and Taxes § 15 Floating Prices and Fallback Procedure for Market Disruption (as per EFET General Agreement) § 16 Guarantees and Credit Support (as per EFET General Agreement) § 17 Performance Assurance (as per EFET General Agreement) § 18 Provision of Financial Statements and Tangible Net Worth (as per EFET General Agreement) § 19 Assignment (as per EFET General Agreement) § 20 Confidentiality (as per EFET General Agreement) § 21 Representation and Warranties § 22 Governing Law and Arbitration Annex 1 Defined Terms Administrator Event AEUA Affected Allowance Aircraft Operator Allowance Allowances Appendix Allowance Type Allowances Termination Amount Allowance Transaction Applicable Rule(s) Appropriate Source Central Administrator Compliance Period Compliance Year Contract Price Contract Quantity Cost of Carry Amount Cost of Carry Calculation Period Cost of Carry Rate Default Cost of Carry Amount Default Cost of Carry Calculation Period Default Cost of Carry Rate Delayed Delivery Date Delivery Business Day Delivered Quantity Delivery Date Delivery Point Delivery Schedule Directive Encumbrance Loss Amount End of Phase Reconciliation Deadline Emissions Trading Scheme(s EU EUA EU ETS EU ETS Directive EUR-EuroSTR-COMPOUND EUTL or European Union Transaction Log Excess Emissions Penalty or EEP Excess Emissions Penalty Equivalent or EEP Equivalent Expert Fourth Compliance Period Holding Account Index Cessation Effective Date Index Cessation Event Long Stop Date Loss Member State National Administrator Negotiation Period New Tax Non-Member State Non-Taxed Party Operator Original Affected Party Other Tax Participating Agreement Paying Party Payment Cycle Physical Settlement Netting Accounts Receiving Party Reconciliation Deadline Registries Regulation Registry Registry Operation Relevant Authority Relevant Registry Rules SE Affected Party SE Affected Transaction Suspension Event TARGET Settlement Day Tax Taxed Party Third Compliance Period Total Contract Price Transfer Transfer Point Unauthorised Transfer Undelivered EEP Amount or UEA Union Registry Unpaid Amounts Value Added Tax or VAT II: Elections for customization of provisions in the Allowances Appendix	1 Subject of Agreement 2 Interpretation and Construction 3 Confirmation Procedure 4 General Obligations, Representations and Warranties 5 Allowance Transfers 6 Effecting Transfers 7 Option Transactions 8 Effect of Option Exercise 9 Billing and Payment 10 Euros 11 Taxes 12 Transfer or Acceptance Failure 13 Force Majeure and Suspension Event 14 Termination 15 Confidentiality 16 Assignment 17 Liabilities 18 Miscellaneous Schedule 1 Definitions Account Pair Administrator Event Affected Allowance Affected Party Affected Tax Party Affiliate Aircraft Operator Allowance Allowance Price Allowance Type American Option Appropriate Source Automatic Exercise Aviation EU Allowance Banking Day Base Rate Bermudan Option Buyer Buy-In Buy-In Period Call Option Central Administrator Central European Time Change in Tax Law Confidential Information Confirmation Contract Amount Contract Value Control and Profit Transfer Agreement Controlling Party Cost of Carry Amount Cost of Carry Calculation Period Cost of Carry Rate Credit Rating Credit Support Document Credit Support Provider Cross default threshold Default Quantity Defaulting Party Delayed Delivery Date Delayed Payment Due Date Delivered Allowance Volume Delivered Allowances Delivering Party Delivering Party’s Delivery Banking Day Location Delivering Party’s Holding Account Delivering Party’s Replacement Cost Delivery Banking Day Delivery Date Directive Early Termination Date EEP Amount EEP Status Encumbrance Loss Entity EU Allowance EU ETS Rules EU ETS EU EURIBOR Euro European Option EUTL Event of Default Excess Emissions Penalty Exercise Period Expert Expiration Date Expiration Time Final Delivery Date FM Affected Party FM Affected Transaction Fourth Validity Period Force Majeure GHG Reductions GHG Holding Account Illegality Affected Transactions Illegality Affected Party Illegality Indebtedness Letter of Credit Long Stop Date Loss Market Amount Market Quotation Agreement Material Adverse Change Member State Member State Registry Monthly Billing Cycle National Administrator No Encumbrances Obligation Non-Defaulting Party Operator Option Transaction Option Original Affected Party Participation Agreement Party Payment Due Date Performance Assurance Provider Performance Assurance Period Traded Allowance Physically Netted Allowances Positive Mark to Market Amount Potential Exercise Day Premium Premium Payment Date PTA Quantity Put Option Receiving Party Receiving Party’s Delivery Banking Day Location Receiving Party’s Holding Account Receiving Party’s Replacement Cost Reconciliation Deadline Reference Market Maker Reference Price Registries Regulation Registry Registry Operation Registry Pair Relevant Authority Relevant Change in Tax Relevant Entity Relevant Registry Relevant Tax Replacement Allowances Replacement Transactions Requesting Party Required Authorisations Schedule System Seller Shortfall Specified Period Specified Transaction Statement Amount Statement Strike Price Suspension Event Tangible Net Worth Termination Currency Termination Payment Date Termination Payment Total Debt Trade Date Transaction Transfer Request Transfer Unauthorised Transfer Undelivered Allowances UNFCCC Union Registry Unpaid Amounts Validity Period Validity Period Reconciliation Deadline Value Added Tax or VAT Schedule 2 Agreement Information (Elections) Schedule 3A Form of Confirmation for Spot/Forward Transactions Schedule 3B Form of Confirmation for Option Transactions