Template:Emissions scope summ

The EU emissions trading scheme divides into a number of “{{{{{1}}}|Compliance Periods}}”. The first was three years January 2005 to December 2007. The second was four, from from January 2008 until December 2012, coinciding with the first commitment period of the Kyoto Protocol. The {{{{{1}}}|Third Compliance Period}} was eight years, from January 2013 to December 2020. The {{{{{1}}}|Fourth Compliance Period}}, also eight years, started in January 2021 and will go until December 2030.

This is of some interest to those trading for physical settlement Allowances that might expire.

ISDA

There is an interesting limitation penned into the Scope section of the Emissions Annex: despite talking about the Third Compliance Period, and defining it, and so on, and providing for the manifold contingencies that arise when having truck with Third Compliance Period Allowances, if you believe the Scope section to be any kind of limitation, you are only meant to deal with Fourth Compliance Period Allowances.

No doubt someone will have a compelling reason for that — do write in if it’s you — but we can’t think of one.

And what are you meant to do if the Specified Compliance Period is the Third Compliance Period? Answers on a postcard.

IETA

The “single agreement” concept

Here several pieces of magic come together to create the capital foundation of the modern master trading agreement. The challenge, originally solved by the First Men, was to create an architecture that allowed discrete, unitary, complete Transactions, such that creating a new one or terminating an old one didn’t upset the economic or legal integrity of other Transactions that were currently on foot — no untoward tax consequences, that is to say — while at the same time creating an umbrella framework so that, should something regrettable happen to either party, all Transactions can be quickly rounded up, evaluated, stopped and then collapsed down — “netted” — to a single payment, payable by one party to the other.

This involved some canny financial engineering. The general rules of set-off require not just a mutuality of parties to the off-setting debts, but also amounts falling due on the same day and in the same currency — neither of which was necessarily true of the independent Transactions executed under a multi-currency, cross-border ISDA Master Agreement.

Their solution was this concept of the “Single Agreement”: the over-arching agreement that, however independent and self-contained Transactions are for any other purpose, when it comes to their early termination, they transmogrify into the single host agreement, in the process reduced to mere calculation inputs to the final amount which one party must pay the other. Thereby the process is not one of “set-off” at all, but of calculating a single net amount, the payment of which would sort out all matters outstanding under the relationship.

The JC once had the idea of doing a “boring talk” about the history of the ISDA Master, and actually pitched it to the BBC for their podcast series. It was rejected, on account of being too boring. True story.