Template:M summ EUA Annex Settlement Disruption

For the avoidance of doubt, this is intended to avoid doubt

There is a wonderful nested uncertainty avoidance device buried in the redundant second paragraph, which effectively says, for the avoidance of doubt, this avoidance of doubt paragraph is intended to avoid doubt, and not actually change anything. Here Ourobos reaches around and eats its own tail: a clause which appears to do something — for why else in a competently-composed passage would it be there? — appears to be there simply to deny its own raison d’etre.

The odd thing is, however that the passage does not avoid doubt so much as create it, for what is

“... the low or non-allocation of Allowances by a Member State or ... the delay or failure of a Member State or Central Administrator to replace Allowances of the Third Compliance Period with Allowances for the Fourth Compliance Period...”

if not “an event or circumstance beyond the control of the party affected that cannot, after the use of all reasonable efforts, be overcome and which makes it impossible for that party to perform its obligations”?

Why should that not be a Settlement Disruption?

Settlement Disruption and Suspension

While there is overlap between Settlement Disruption Events and Suspension Events (in that both are things beyond the parties’ control) Suspension Event, being narrower and related to the failure of official infrastructure, trumps Settlement Disruption Event where they both apply to the same event. Generalia specialibus non derogant, I suppose.

Note the Long-Stop Date concept, which references 1 June in a year following a set of seemingly arbitrary two-year spells in the Fourth Compliance Period and relates only to Suspension Events, not Settlement Disruption Events, and also appears to bear no relation at all to the Reconciliation Deadline at the end of April in each year.

We have compared Settlement Disruption Events and Suspension Events here.

Some rather magical (in the sense of being quite impenetrable) thinking from ISDA’s crack drafting squad™ here, in the name of seeking a long-stop to a Settlement Disruption Event. Since there is this Reconciliation Deadline concept — 30 April each year — by which time, certain EUAs have to be surrendered, an ongoing settlement disruption can be a rather fraught thing. Emissions Allowances can suddenly, by government fiat, become worthless in a way that most other financial instruments cannot.

What happens? Well, after 9 delivery Business Days (or such shorter period as may be dictated by Reconciliation Deadlines) the disruption is deemed to be an Illegality — I know, I know: it isn’t even close to being an Illegality — and depending on whether Payment on Termination for Settlement Disruption applies, the parties either have to perform their obligations after all — odd, since the Settlement Disruption Event is ongoing, and Q.E.D. they can’t — or the transaction is basically voided ab initio and both parties walk away, refunding any put or call premiums they may previously have received.

Payment on Termination for Settlement Disruption

Not for the only time in this Annex, ISDA’s crack drafting squad™ have contemplated an outcome which doesn’t feel enormously derivative literate.

If there is a Settlement Disruption Event — say I have sold you forward some Allowances, but for some external reason beyond my control and personal culpability, when it comes time to deliver them, transiently I cannot — then, for the want of any better idea, the Transaction goes into sort of suspended animation. Fair enough: mountain, Mohammed and all that. But my obligations are still there. They are just put on ice.

Aren’t they?

But once that disruption has lifted, what should we do? We are back at the races. We should, therefore carry on, you would think; perhaps with some allowance for cost of carry. And indeed this is what might happen, but only if you elect that Payment on Termination for Settlement Disruption should apply. In this case the parties’ obligations — which, according to the theory of the game, have been disrupted and cannot in practice be performed, remember — resume as of the Early Termination Date. Here, refer to our guide to closing out the ISDA Master Agreement, which contains a mechanism for ascertaining the value of undelivered and unpaid obligations.

But as you do, notice also equivalent provisions in the 2002 ISDA Equity Derivatives Definitions where disrupty things happen: here there is a special Cancellation and Payment method of determining the final value of this broken contract: it does not rely on Early Termination, and does not presume either party to have committed an Termination Event or an Event of Default.

But weirder still is what happens if you haven’t specified Payment on Termination for Settlement Disruption: this is the then I woke up and it was all a dream school of drafting. If you don’t, the parties simply walk away — refunding pre-paid forward payments, and hanging on to whatever it is that they sold.

Now folks: on what planet in the entire ISDA extended fan-fiction galaxy would anyone ever do that? This might feel like the sort of thing was lost sacred knowledge to the Children of the Woods — a kind of environmentally-friendly reprise to the never-used First Method — but come on folks. This is the 2020s. And besides, here the operating theory is the Settlement Disruption Event has lifted. The seller is perfectly able to perform the contract. Why wouldn’t it?