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EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions
A Jolly Contrarian owner’s manual™
Disruption in a Nutshell™
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Disruption in all its glory
(d)(i)(4) Settlement Disruption Event
- (A) Notification of Settlement Disruption Event: Upon the occurrence of a Settlement Disruption Event, either party may notify the other party in writing of the commencement of the Settlement Disruption Event and the EU Emissions Allowance Transaction(s) affected by that Settlement Disruption Event. Where the notification is from the party affected by the Settlement Disruption Event, to the extent available to such party, it shall also provide details of the Settlement Disruption Event and a non-binding estimate of the extent and the expected duration of its inability to perform its obligations due to the Settlement Disruption Event.
- (B) Effect of Settlement Disruption Event: If a Settlement Disruption Event occurs, the obligations of both parties which would otherwise be required to be performed with respect to the EU Emissions Allowance Transaction(s) affected by the Settlement Disruption Event will be suspended for the duration of the Settlement Disruption Event and, subject to (d)(i)(4)(D) (Continuing Settlement Disruption Event) below, will not be required to be performed until the Settlement Disruption Event is overcome or ceases to exist. During the continuation of the Settlement Disruption Event, the party affected by the Settlement Disruption Event shall continue to use all reasonable endeavours to overcome the Settlement Disruption Event.
- (C) Settlement Disruption Event Delayed Performance: Subject to Part (d)(i)(4)(D)(Continuing Settlement Disruption Event) below, upon the Settlement Disruption Event being overcome or ceasing to subsist, both parties will be required, as soon as reasonably practicable but not later than the second Delivery Business Day following the date upon which the Settlement Disruption Event has been overcome or ceases to exist, to resume full performance of their obligations under this Agreement in respect of the relevant EU Emissions Allowance Transaction(s) (including, for the avoidance of doubt, any suspended obligations).
- (D) Continuing Settlement Disruption Event: In respect of an EU Emissions Allowance Transaction affected by a Settlement Disruption Event, where the Settlement Disruption Event continues:
- (I) during the period ending 9 Delivery Business Days after the original date that, but for the Settlement Disruption Event, would have been the Delivery Date for an EU Emissions Allowance Transaction; or
- (II) if such 9 Delivery Business Day period would end after the Reconciliation Deadline on or immediately following the original date that, but for the Settlement Disruption Event, would have been the Delivery Date for an EU Emissions Allowance Transaction, during the period ending on that Reconciliation Deadline; or
- (III) if such 9 Delivery Business Day period would end after the day that is 3 Delivery Business Days preceding the End of Phase Reconciliation Deadline on or immediately following the original date that, but for the Settlement Disruption Event, would have been the Delivery Date for an EU Emissions Allowance Transaction, during the period ending on the day that is 3 Delivery Business Days preceding that End of Phase Reconciliation Deadline,
- then on that 9th Delivery Business Day, Reconciliation Deadline or day that is 3 Delivery Business Days preceding the End of Phase Reconciliation Deadline (as the case may be), an [Additional Termination Event][Illegality][1] shall be deemed to have occurred in respect of which the relevant EU Emissions Allowance Transaction is the sole Affected Transaction, both parties are Affected Parties[, no Waiting Period will apply] and, if an Early Termination Date results from that Termination Event, then, for purposes of determining any amount payable under Section 6(e) in respect of that Early Termination Date:
- (i) if “Payment on Termination for Settlement Disruption” is specified to be applicable in the Annex to this Part 5 or the Confirmation for the relevant EU Emissions Allowance Transaction, it will be deemed that the requirement to perform the suspended obligations resumed on the Early Termination Date; or
- (ii) if “Payment on Termination for Settlement Disruption” is specified to be inapplicable in the Annex to this Part or the Confirmation for the relevant EU Emissions Allowance Transaction, it will be deemed that the parties had no further delivery or payment obligations in respect of the EU Emissions Allowance Transaction after the occurrence of the Settlement Disruption Event (other than in respect of any payment due by one party in connection with delivery obligations already performed by the other party); provided, however, that
- (i) Delivering Party shall promptly refund to Receiving Party any amount that may have been paid by Receiving Party in respect of the EU Emissions Allowance Transaction that is an Allowance Forward Transaction or a Call and
- (ii) Receiving Party shall promptly refund to Delivering Party any amount that may have been paid by Delivering Party in respect of an EU Emissions Allowance Transaction that is a Put (in each case, other than in respect of delivered Allowances) together with interest on that amount in the same currency as that amount for the period from (and including) the date that amount was paid to (but excluding) the date of termination of such EU Emissions Allowance Transaction, at the rate certified by the party required to refund the amount to be a rate offered to such party by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to be selected in good faith by that party for purposes of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in the relevant market.
(d)(i)(5) Suspension Event
- (A) Notification of Suspension Event: Upon the occurrence of a Suspension Event, the party affected by the Suspension Event shall, as soon as reasonably practicable, notify the other party in writing of the commencement of the Suspension Event. To the extent available to the party affected by the Suspension Event, it shall also provide details of the Suspension Event including a non-binding estimate of the duration of its inability to perform its obligations due to the Suspension Event.
- (B) Effect of Suspension Event: Where a Suspension Event occurs, the obligations of both parties which would otherwise be required to be performed with respect to the EU Emissions Allowance Transaction(s) affected by the Suspension Event will be suspended for the duration of the Suspension Event and, subject to Part (d)(i)(5)(D)(Continuing Suspension Event) below, will not be required to be performed until the Suspension Event ceases to exist.
- (C) Suspension Event Delayed Performance: Subject to Part (d)(i)(5)(D)(Continuing Suspension Event) below, upon the Suspension Event ceasing to exist, both parties will be required to resume full performance of their obligations under this Agreement in respect of the relevant EU Emissions Allowance Transaction (including, for the avoidance of doubt, any suspended obligations) as soon as possible but no later than the day that is the earlier of: (i) the tenth Delivery Business Day following the date on which the Suspension Event ceases to exist; and (ii) 3 Delivery Business Days prior to the End of Phase Reconciliation Deadline (the “Delayed Delivery Date”).
- In the event that the Allowances to be Delivered are delivered to Receiving Party on or before the Delayed Delivery Date following the occurrence of a Suspension Event as contemplated by Part (d)(i)(5)(B)(Effect of a Suspension Event) above, Receiving Party agrees to pay Delivering Party on the Delayed Payment Date:
- (I) for the purposes of an Allowance Forward Transaction, an amount equal to the sum of: (X) Allowance Purchase Price multiplied by the Number of Allowances delivered on or before the relevant Delayed Delivery Date; and (Y) the Cost of Carry Amount; or
- (II) for the purposes of an Allowance Option Transaction, an amount equal to the sum of: (X) the Allowance Strike Price multiplied by the Number of Allowances delivered on or before the relevant Delayed Delivery Date; and (Y) the Cost of Carry Amount.
- For the avoidance of doubt, the Cost of Carry Amount shall be identified in the relevant VAT Invoice sent to Receiving Party.
- (D) Continuing Suspension Event: Where:
- [(I)][2] a Suspension Event continues to exist on the Long-Stop Date, then an [Additional Termination Event]/[Illegality] shall be deemed to have occurred in respect of which the relevant EU Emissions Allowance Transaction is the sole Affected Transaction [,]/[and] both parties are Affected Parties [and no Waiting Period will apply]. The parties agree that the Long-Stop Date will be the Early Termination Date for the purposes of the relevant EU Emissions Allowance Transaction. For purposes of determining any amount payable under Section 6(e) in respect of that Early Termination Date, it will be deemed that the parties had no further delivery or payment obligations in respect of the EU Emissions Allowance Transaction after the occurrence of the Suspension Event (other than in respect of any payment due by one party in connection with delivery obligations already performed by the other party); provided, however, that (i) Delivering Party shall promptly refund to Receiving Party any amount that may have been paid by Receiving Party in respect of the EU Emissions Allowance Transaction that is an Allowance Forward Transaction or a Call and (ii) Receiving Party shall promptly refund to Delivering Party any amount that may have been paid by Delivering Party in respect of an EU Emissions Allowance Transaction that is a Put (in each case, other than in respect of delivered Allowances) together with interest on that amount in the same currency as that amount for the period from (and including) the date that amount was paid to (but excluding) the date of termination of such EU Emissions Allowance Transaction, at the rate certified by the party required to refund the amount to be a rate offered to such party by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to be selected in good faith by that party for purposes of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in the relevant market.
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Comparison
Resources and Navigation
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Overview
A JC invention to capture the two types of Force Majeure style disruption to the settlement of an Allowance Transaction. For more detail see the two separate pages:
Settlement Disruption Event
Suspension Event
Summary
The Emissions clerical-industrial complex, for reasons best known to itself, differentiates entirely between obstacles to the settlement of a Transaction that arise through some kind of failure of the regulatory infrastructure — these are termed Suspension Events — and failures that arise for other, market-related dislocations the blame for which cannot reasonably be laid at the door or either counterparty. These are Force Majeure Events, in the EFET Allowances Appendix and IETA Master Agreement, but Settlement Disruption Events in the ISDA EU Emissions Annex.
Economically, they behave differently too. There are certain justifications for this — seeing as a Suspension Event is a failure of the actual regulatory architecture it is not really likely that a party can be penalised by that same architecture for not doing what it was supposed to be doing by the time it was supposed to be doing it, so there should be no question of EEPs, or closing out of Force Majeure Events before Reconciliation Deadlines and so on.
But there are other aspects which make less sense. Firstly, only the Suspension Event attracts a Cost of Carry Amount, though in either case the Receiving Party is, as a result, entitled to delay its payment for the allowances, and therefore benefits from a funding position, and secondly, should the Disruption in question not lift within a stipulated time (a short period in the case of a Force Majeure; a long one in the case of Suspension Event) the presumption is that the Transaction should be resolved by just drawing a line through it and pretending it never happened. This — we call it the “then I woke up and it was all a dream” style of logjam resolution — seems totally barmy.
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See also
References
- ↑ If the form of Master Agreement in which this Part is included is a 1992 ISDA the parties should specify “Additional Termination Event” or, if the form of Master Agreement which the Confirmation supplements is an 2002 ISDA the parties should specify “Illegality”.
- ↑ We think this number is superfluous, in that there is not a (II).