Template:M summ EFET Allowance Annex 4.3

If applied, if the Parties happen to be transferring fungible Allowances to each other on the same day and between the same specified Holding Accounts, you can net settle. As with the ISDA equivalent (Section 2(c)) a physical netting clause is not really a legal thing, seeing as you either do net settle, in which case everyone gets what they need and there is nothing to sue about, or you don’t — one party forgets, so over-delivers, and there is all sorts of rebalancing, transferring back required and so on.

Here’s what the JC has to say about ISDA settlement netting:

Section 2(c) is about “settlement” or “payment” netting — that is, the operational settlement of offsetting payments due on any day under the normal operation of the Agreement — and not the more drastic close-out netting, which is the Early Termination of all Transactions under Section 6.

If you want to know more about close-out netting, see Single Agreement and Early Termination Amount.

We wonder what the point of this section is, since settlement netting is a factual operational process for performing existing legal obligations, rather than any kind of variation of the parties’ rights and obligations. If you owe me ten pounds and I owe you ten pounds, and we agree to both keep our tenners, what cause of action arises? What loss is there? We have settled our existing obligations differently.

To be sure, if I pay you your tenner and you don’t pay me mine, that’s a different story — but then there is no settlement netting at all. The only time one would wish to enforce settlement netting it must, ipso facto, have happened, so what do you think you’re going to court to enforce?