Template:M summ EUA Annex Suspension

Someone has got a mind infested by nefarious phantoms, readers: either the ISDA’s crack drafting squad™ does, collectively, or the JC does. We are totally not ruling out the JC, to be clear. But this is too weird.

You may never thank us for producing this diagram of how the various Suspension Events and Disruption Events do, or don’t interact with each other: it is probably wrong and we will never get that two hours back. But here it is for whatever small crumb of enlightenment it may bring.

I know, I know. Shoot me.

A Suspension Event happens when the official infrastructure falls over so that the parties can’t transfer Allowances to settle a Transaction. It is the fault of neither party — therefore to be distinguished from a Failure to Deliver, which generally will be. While there is overlap between Settlement Disruption Events and Suspension Events (in that both are things beyond the parties’ control) Suspension Event, being narrower and related to the failure of official infrastructure, trumps Settlement Disruption Event where they both apply to the same event. Generalia specialibus non derogant, I suppose.

Note the Long-Stop Date concept, which references 1 June in a year following a set of seemingly arbitrary two-year spells in the Fourth Compliance Period and relates only to Suspension Events, not Settlement Disruption Events, and also appears to bear no relation at all to the Reconciliation Deadline at the end of April in each year.

We have compared Settlement Disruption Events and Suspension Events here.

A curiosity to which the JC has not yet found a plausible answer is why there is a Cost of Carry adjustment for Suspension Events that run over the scheduled Delivery Date, but not for other, ordinary Settlement Disruption Events (or for that matter, Failures to Deliver).

Concept

Concept is this: I sold Allowances to you, due to settle on date T. On that date, we are due to DVP: you give me cash; I give you Allowances.

But on that date, I am “suspended” and, through no fault of my own, I can’t settle the Allowances to you. The system is on the Fritz. The EU has gone down. Something like that. Something that is nothing to do with me.

You could, of course, pay me the cash no problem and I’ll punt you the Allowances as soon as the suspension lifts — but who does that, in these credit-straitened times? So we suspend, and wait for the disruption to clear. This usually takes a few days (we are given to understand there has been one meaningful suspension in the market in five years, and it lasted a couple of weeks. Don’t quote me on this).

So far, so hoopy. But the question arises: How should we adjust our payment obligations? I was expecting cash from you on T, and now I’m not getting it. But I no longer want or need the Allowances, so the fact that I still have them is beside the point for me: they are clogging up my garage, stopping me putting anything else in it: in the vernacular, I am having to fund these things, even though I thought I sold them to you. I am obliged to continue to carry them. This costs me. (You ever met my Treasury guys? They aren’t fun). So this settlement disruption is your problem.

Definition of Suspension Event

Comprises Administrator Events and a lack of Registry Operation: These are not the sorts of things that can affect “some but not all” of the Allowances in an account, so unless you are the sort of groover who warehouses your Allowances in Registries all around the EU, there being an event of this kind will put your whole Transaction into Suspension, not just part of it.

Notification

Notification of the Suspension Event: fair enough. But what use is a “non-binding” estimate of how long the suspension will last? Being, Q.E.D., an event entirely outside the control of either party, how is one expected to know, and in what way is the sum total of human knowledge advanced by one having a guess? And it if is non-binding, what is the sanction for failing to do it?

Effect of Suspension Event

Terminology confusion risk here: talk of Transactions “affected” by the Suspension Event sounds a bit like “Affected Transaction”, but that is of course quite a different thing in ISDA lore. Had it been me — and I do regularly thank those who watch over us that it wasn’t — I might have used a word like “disrupted” or “suspended” (and I might have been tempted to treat disruptions and suspensions the same way).

Delayed Performance

So, if the Suspension Event lifts, we agree you should pay me a Cost of Carry Amount to compensate me for my continuing funding cost for holding these Allowances. There is an inexplicable 10 Delivery Business Day grace period — unless you are backs-to-wall on an End of Phase Reconciliation Deadline beyond which your EUAs are worthless, but that’s quite the outlier, not due to happen until 2031 — to deliver late EUAs once the Suspension Event does lift, by the way. I mean, why wait ten days? Things are back to normal. Settle up already. If we assume that the Suspension Event came about thanks to some cataclysmic event or another, and markets are choppy, risk officers running around with their hair on fire etc etc., no one will want to indulge a counterparty for two working weeks just to deliver some carbon credits.

Cost of Carry Delay

So there is cost of carry compensation, of course, to incentivise delivering parties to get on with it. But that 10 days still offers up a fair bit of unnecessary optionality, if the market is pogoing around and the cost of carry is manageable.

But it is calculated in a pretty weird way. We think the ISDA’s crack drafting squad™ is over-thinking it, or under-thinking it, or cross-thinking it. For you only seem to pay the cost of carry on the Allowances you can deliver at (or before) the Delayed Delivery Date — even if you delivered some of then before the date, you pay the Cost of Carry Rate on the whole size for the whole period. And If the Suspension Event doesn’t lift by the Long-Stop Date then we don’t know what happens about the Cost of Carry.