Template:M summ EUA Annex Settlement Disruption

Oft mentioned in a similar breath to a Suspension Event and a Failure to Deliver, a Settlement Disruption Event is one of the external events which leads to a suspension of obligations, pending the lifting of the disruption, that are set out in the Settlement Disruption provisions of Paragraph (d)(i)(4) of the ISDA EU Emissions Annex.

There is a wonderful nested uncertainty avoidance device buried in the redundant second paragraph, which effectively says, for the avoidance of doubt, this avoidance of doubt paragraph is intended to avoid doubt, and not actually change anything. Here Ourobos reaches around and eats its own tail: a clause which appears to do something — for why else in a competently-composed passage would it be there? — appears to be there simply to deny its own raison d’etre.

Some rather magical (in the sense of being quite impenetrable) thinking from ISDA’s crack drafting squad™ here, in the name of seeking a long-stop to a Settlement Disruption Event. Since there is this Reconciliation Deadline concept — 30 April each year — by which time, certain EUAs have to be surrendered, an ongoing settlement disruption can be a rather fraught thing. Emissions Allowances can suddenly, by government fiat, become worthless in a way that most other financial instruments cannot.

What happens? Well, after 9 delivery Business Days (or such shorter period as may be dictated by Reconciliation Deadlines) the disruption is deemed to be an Illegality — I know, I know: it isn’t even close to being an Illegality — and depending on whether Payment on Termination for Settlement Disruption applies, the parties either have to perform their obligations after all — odd, since the Settlement Disruption Event is ongoing, and Q.E.D. they can’t — or the transaction is basically voided ab initio and both parties walk away, refunding any put or call premiums they may previously have received.