Template:M summ IETA 5.1

As for Section (d)(i)(2) of the ISDA EU Emissions Annex, we are not sure what the significance of only being obliged to deliver from your Holding Account would be, but note its moderation by 5.2: 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.

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.