Template:M summ IETA 5.1

Settlement (ISDA), Scheduling (EFET), Primary Obligation (IETA) — the core provision that sets out who pays what, where and to whom, for Option Transactions and Forward Transactions.

The JC is no great fan of definitions, but God only knows, in the ISDA one would have come in handy here. You know, a “Purchase Amount” for Forward Transactions, or a “Strike Amount” for Option Transactions (or a “Payment Amount”, for both) might have been nice, given they are the key concepts in Option Transactions and Forward Transactions.

As for “Allowances to be Delivered” — okay, there is at least a term for the physical half of that, but it’s rubbish. What about “Delivery Amount”?

There is a distinction between the “Number of Allowances” — effectively the notional size of the whole trade — and the “Allowances to be Delivered” — the portion of it that is settling on any given day. The difference is that American options can settle in part, on any day in the term of the Transaction. Forwards typically don’t — they all settle on a pre-agreed settlement date

(To be fair to the Emissions ninjas at IETA, they do have this concept: “Contract Amount”).

Well, the JC has introduced these words into the nutshell summary to make life a bit easier to follow. Just remember they are not there in the real thing. Unless you put them in.

Cash Settlement: Trick question. There is no provision for cash-settlement in the emissions trading world. Will that stop counterparties asking you to specify a settlement method? Probably not. Does it matter? Also probably not. What if you want a cash settlement option? Not out of the ballpark — one’s eligibility for EMIR, and as such hedge exemptions, might depend on whether the forward is able to be cash-settled, in theory, or not. (There is no good reason for this: it springs from the paranoid brow of those toiler legal counsel who trying to parse the eligibility or Emissions derivatives under the refitted delegated regulations of MiFID 2 — our advice is just don’t go there — but you just never know.)

Transfer from a specified Holding Account

Curious conditionality, across all three versions, where the Delivering Party specifies a Holding Account from which Allowances must be delivered, and not just the account to which they must be delivered. Quite why it should matter whence the Allowances come we cannot say — a vague fretfulness about theft perhaps? — but ok; let’s run with it.

Note, in any case, its moderation in IETA (5.2) whereby one has an obligation to make sure there are sufficient allowances in your account to satisfy your delivery obligation. So even though you can’t be forced to deliver from anywhere else, you can be sued for losses arising from your failure to ensure there was something to deliver in your Holding Account. All rather cack-handed, but in “fundamental upshot” terms, this does get to the right place.

The transfer is done once the Allowances hit the Receiving Party’s account (I know, I know: you don’t say.) But wait: there is an interesting use of the word “whereupon” here, upon which we dwell in a bit more detail in the premium section.

Clause 5.1(a)

Clause 5.1(a) sets up the basic sale and purchase obligation for the Allowances.

Clause 5.1(b)

Clause 5.1(b) is oddly arranged, pre-cross-referencing the sub-paragraphs with trade details, when it should just be setting them out. A more intuitive way of laying it out might have been this:

5.1(b) Trade Details: Each Confirmation must specify the following details (Trade Details):

(i) an Allowance Type.

(ii) an Allowance Price.

(iii) a PTA Quantity.

(iv) a Specified Period.

(v) Payment Due Date.

5.1(bb) Multiple Delivery Dates: Where one Confirmation specifies separate Trade Details for multiple Delivery Date, each Transfer on each Delivery Date will be a separate Transaction, on identical terms but for the relevant Delivery Date and Trade Details.

But look that’s just me.

Clause 5.1(c)

Note that odd coda in Section 5.1(c) where the Receiving Party agrees that the Delivering Party’s obligation is limited to :

• an obligation to transfer Period Traded Allowances (which is fine, and no more than what is specified be be deliverable under the Transaction in any case)
• from any of the Delivering Party’s Holding Accounts — and this one baffles us, especially as it says the the Delivering Party is “limited to” delivering from this account, rather than being obliged to deliver from that account, in which case it still has the problem of ensuring there are Allowances in the account in a fit state to deliver. We have more to say about this in the premium section.
• to the Receiving Party’s Holding Account — so we suppose this heads off the Receiving Party doing something odd like saying, “oh, can you deliver it to my Russian subsidiary’s Holding Account” or “can you leave it on a fire hydrant outside Raffles Hotel in Singapore”. But again this one seems to state the bleeding obvious. The contract says Delivering Party must deliver to Receiving Party’s Holding Account, so that is all Delivering Party is obliged to do.

This mirrors Section (d)(i)(2)(B) of the ISDA EU Emissions Annex — or rather, we fancy, that part of the ISDA EU Emissions Annex mirrors it, because the language is strikingly similar in its bafflability. Compare:

(B) Notwithstanding Part(d)(i)(2)(A) above, if Delivering Party has one or more Specified Holding Accounts for the relevant EU Emissions Allowance Transaction, Delivering Party’s obligation to deliver Allowances under an EU Emissions Allowance Transaction shall be limited to an obligation to deliver from any such Specified Holding Account of Delivering Party to the relevant Specified Holding Account of Receiving Party.

Clause 5.1(d)

In its yen to over-specify and state the obvious, the IETA Master Agreement almost trips itself up: obviously the Transfer can’t be complete until the Allowances have arrived in the Receiving Party’s Holding Account (and, for the record, the no encumbrances condition of Clause 5.3 is complied with); and it is true the risk of loss of the actually transferred Period Traded Allowances only shifts at that point, but do note the other risks associated with the generic class of Allowances being sold: economic ones, market value, abandonment of scheme risks and so on — transfer at the moment of trade.

This is something that practitioners in the carbon market seem confused about.

And as for that “whereupon” — well, see our premium section for more on that.