Template:M summ EUA Annex (d)(iii)

For the Seller doesn’t deliver the full quota of allowances to be delivered, the Buyer only has to pay the agreed strike/purchase price for those that are delivered, and the remainder of the Transaction will be closed out as if it were a Failure to Deliver. This is a bit curious — why wouldn’t it just be closed out under normal Section 6 close-out methodology and the undelivered portion be treated as an Unpaid Amount? But it probably gets to a similar place (though perhaps it pauses Section 2(a)(iii) at least until the pro-rata partial payment is made. Again; as to why, search us.

One possible reason is the outside contingency that the Buyer is holding Phase 3 Allowances which, by regulatory decree, have unexpectedly become ineligible or some such thing — we think this is a highly remote contingency, seeing as the EUA futures contracts don’t differentiate between Phase 3 and Phase 4, so market participants can hardly control which type of EUAs they hold, and it would be perverse and counterproductive behaviour for ESMA to suddenly deem part of the market inelibigible.

But, look — no-one is denying regulators do ill-advised and counterintuitive things; so you never know.

But we don’t think that is it: for one thing, if that event happens there will almost certainly be plenty of notice. Phase 3 and Phase 3 Allowances, which currently trade as if fungible, will rapidly decouple, and the best mechanism would be for Buyers to be able to accelerate delivery of Phase 3 Allowances to surrender those first.