UK 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.

Part [•]. UK 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
AUKA Allowance or AUK 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
UK
UK Allowance
UKTL or European Transaction Log
Excess Emissions Penalty/EEP
Expiration Date
Final Compliance Date
Final Delivery Date
Fourth Compliance Period
Holding Account
Indemnifiable EEP
Long-Stop Date
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