Settlement - Emissions Annex Provision
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EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions
Section (d)(i)(1) in a Nutshell™ Use at your own risk, campers!
Full text of Section (d)(i)(1)
Comparison See our natty emissions comparison table between the IETA, EFET and ISDA versions of emissions trading docs
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Content and comparisons
The same broad concept is dealt with as follows:
- ISDA: Settlement
- EFET: Delivery, Acceptance and Scheduling Obligations
- IETA: Primary Obligation
Situation normal... : Techy drafting slip from ISDA’s crack drafting squad™: “Number of Allowances to be Delivered” isn’t a thing: there is “Number of Allowances”, which is the notional size of the Transaction, and then there is Allowances to be Delivered which references the particular number of Allowances to be settled under an Option and thus already builds in a number.
Summary
Settlement (ISDA), Scheduling (EFET), Primary Obligation (IETA) — the core provision that sets out who pays what, where and to whom, for Option Transactions and Forward Transactions.
The JC is no great fan of definitions, but God only knows, in the ISDA one would have come in handy here. You know, a “Purchase Amount” for Forward Transactions, or a “Strike Amount” for Option Transactions (or a “Payment Amount”, for both) might have been nice, given they are the key concepts in Option Transactions and Forward Transactions.
As for “Allowances to be Delivered” — okay, there is at least a term for the physical half of that, but it’s rubbish. What about “Delivery Amount”?
There is a distinction between the “Number of Allowances” — effectively the notional size of the whole trade — and the “Allowances to be Delivered” — the portion of it that is settling on any given day. The difference is that American options can settle in part, on any day in the term of the Transaction. Forwards typically don’t — they all settle on a pre-agreed settlement date
(To be fair to the Emissions ninjas at IETA, they do have this concept: “Contract Amount”).
Well, the JC has introduced these words into the nutshell summary to make life a bit easier to follow. Just remember they are not there in the real thing. Unless you put them in.
Cash Settlement: Trick question. There is no provision for cash-settlement in the emissions trading world. Will that stop counterparties asking you to specify a settlement method? Probably not. Does it matter? Also probably not. What if you want a cash settlement option? Not out of the ballpark — one’s eligibility for EMIR, and as such hedge exemptions, might depend on whether the forward is able to be cash-settled, in theory, or not. (There is no good reason for this: it springs from the paranoid brow of those toiler legal counsel who trying to parse the eligibility or Emissions derivatives under the refitted delegated regulations of MiFID 2 — our advice is just don’t go there — but you just never know.)