Settlement Disruption - Emissions Annex Provision
EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions A Jolly Contrarian owner’s manual™ Settlement Disruption in all its glory
Comparison See our natty emissions comparison table between the IETA, EFET and ISDA versions of emissions trading docs
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Overview
The same broad concept is dealt with as follows:
- ISDA: Settlement Disruption Event
- EFET: Force Majeure
- IETA: Force Majeure
Functionally, the definitions of “Force Majeure” under Clause 7.1 the EFET Annex and Clause 13 of the IETA, and the definition of “Settlement Disruption Event” under (d)(i)(4) of the ISDA Emissions Annex are the same — here is a comparison between IETA and EFET, and here is a comparison between EFET and ISDA — so you do wonder whose idea it was to call it something different.
Let us speculate: the IETA was written first, is independent of the ISDA universe, and for reasons best known to IETA’s crack drafting squad™, they decided to call this a “Force Majeure”. Being an event beyond the reasonable control of the affected party there is some logic to this.
ISDA’s crack drafting squad™ was, as usual, late to the “novel asset class” party and, as it couldn’t find a spot, decided to park its tanks on IETA’s lawn, borrowing much of the technology wholesale but unable to call this event a Force Majeure because the ISDA Master Agreement already has a Force Majeure Event, this is quite different — for whatever reason, the timings are a lot longer — and that would confuse people even beyond ISDA’s tolerance for confusing people.[2]
So ISDA’s crack drafting squad™ went with its product specific “stuff happens” label, “Settlement Disruption Event”. In any case, to make your lives easier, “Force Majeure - Emissions Annex Provision” redirects to Settlement Disruption Event. The JC’s nice like that.
The differences are to account for the architecture and nomenclature of the different master agreements, though the IETA has a conflict clause favouring Suspension Event over Force Majeure/Settlement Disruption Event, which the EFET does not.
Summary
Settlement Disruption and Suspension beg for comparison, so here is one: compare them. See also our laborious, but probably wasted effort, of a table parsing when, and when not, to apply them:
Traumnovelle
It is interesting to compare, across all three of the emissions trading documentation suites, the differences and similarities when it comes to resolving an unquenchable Settlement Disruption Event.
- Notification: All are the same: either party can notify a Settlement Disruption Event. If the affected party is the one who calls it — but, curiously, not if it isn’t, which sets up some odd incentives, but hey — it must use reasonable endeavours to overcome a situation that is, by definition, beyond its control.
- Longstop date: all have variations of a longstop of no later than 9 Delivery Business Days after the scheduled Delivery Date, or earlier should a Reconciliation Deadline intervene. ISDA and EFET also throw in an End of Phase Reconciliation Deadline. Which is nice.
- Consequences of hitting the longstop: All of the agreements opt for the “then I woke up and it was all a dream” method of closeout — Payment on Termination for Settlement Disruption, at least as an option. They allow the alternative option for a Payment on Termination: ISDA goes for an Early Termination Date as if an Illegality Termination Event, with no Waiting Period, had occurred. EFET and IETA both try to reconstruct something like the termination methodology of a 1992 ISDA, descending into all that ugliness of “Market Quotation” and “Loss”.
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- The JC’s famous Nutshell™ summary of this clause
- The paradoxical nature of being obliged to take reasonable efforts to overcome something that is beyond your reasonable control
- For the avoidance of doubt, this is intended to avoid doubt
- Settlement Disruption versus Suspension Event
- Payment on Settlement Disruption Event
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”.
- ↑ Seeing as the IETA Master Agreement borrows technology from the 1992 ISDA is is conceivable that IETA’s crack drafting squad™ didn’t realise there was a Force Majeure Event in the 2002 ISDA, as there was not one in the 1992 ISDA. I am guessing.