2007 EFET General Agreement
Version 2.1(a) (Power)
A Jolly Contrarian owner’s manual™
4.3 in a Nutshell™
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4.3 in all its glory
- § 4.3 Physical Settlement Netting
- (a) If this § 4.3 is specified as applying in Part II of this Allowances Appendix; if on any date Allowances of the same Allowance Type and Compliance Period would otherwise be Transferable in respect of two or more Allowance Transactions between the Parties and between designated pairs of Holding Accounts specified as applying in Part II of this Allowances Appendix or otherwise agreed between the Parties (the “Physical Settlement Netting Accounts”), then, on such date, each Party’s obligation to Schedule and Transfer any such Allowances will be automatically satisfied and discharged and, if the aggregate number of Allowances that would otherwise have been Transferable by one Party exceeds the aggregate number of Allowances that would otherwise have been Transferable by the other Party, replaced by an obligation upon the Party from whom the larger aggregate number of Allowances would have been Transferable to Schedule and Transfer to the other Party a number of Allowances (of the same Allowance Type and Compliance Period) equal to the excess of the larger aggregate number of Allowances over the smaller aggregate number of Allowances (the “Net Contract Quantity”) (such process hereinafter referred to as “Physical Settlement Netting”). In such circumstances the Party Transferring the Net Contract Quantity shall be the “Net Seller” and the Party receiving the Net Contract Quantity shall be the “Net Buyer”. In instances where the Net Contract Quantity for a given date and Delivery Point is zero, the Parties shall be released from any obligation to Schedule and Transfer or accept such Transfer in respect of the applicable Allowance Transactions on such date. For the avoidance of doubt and subject to this § 4.3, the Parties fully intend at the time of entering into each Individual Contract that such Individual Contract will result in the physical Transfer of Allowances.
- (b) Unless otherwise provided, if there is more than one Allowance Transaction between the Parties providing for Transfer of Allowances of the same Allowance Type and Compliance Period at the same Delivery Point on the same date, all references in the General Agreement, this Allowances Appendix and an Individual Contract to a “Seller”, “Buyer”, “Contract Quantity” and “Individual Contract” shall be deemed to be references to, respectively, a “Net Seller”, a “Net Buyer”, a “Net Contract Quantity” and to all such Individual Contracts.
- (c) For the avoidance of doubt, specifying Physical Settlement Netting Accounts under this § 4.3 (Physical Settlement Netting) need not preclude the Parties from designating Delivery Point(s) and/or Transfer Points under § 4.1 (Delivery, Acceptance and Scheduling Obligations) nor is it intended to prohibit the Parties from limiting their rights and obligations in respect of any particular Allowance Transaction to Transfer and accept Transfer of Allowances in accordance with § 4.1.
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Unclear how often this clause would be used in practice: while brokers and dealers in the carbon markets may well be long and short fungible Allowances at the same time as a result of their market-making business, end users and other market participants are less likely to be, and we suspect the headache of working out exactly how long or short you are in which designated Holding Account to which counterparty is larger than the operational convenience of not having to deliver out lots of Allowances. This is just a guess, however.
If applied, if the Parties happen to be transferring fungible Allowances to each other on the same day and between the same specified Holding Accounts, you can net settle. As with the ISDA equivalent (Section 2(c)) a physical netting clause is not really a legal thing, seeing as you either do net settle, in which case everyone gets what they need and there is nothing to sue about, or you don’t — one party forgets, so over-delivers, and there is all sorts of rebalancing, transferring back required and so on.
Here’s what the JC has to say about ISDA settlement netting:
Our chief contrarian wonders what on earth the point of this section is, since settlement netting is a factual operational process for performing existing legal obligations, rather than any kind of variation of the parties’ rights and obligations. If you owe me ten pounds and I owe you ten pounds, and we agree to both keep our tenners, what cause of action arises? What loss is there? We have settled our existing obligations in different way.
To be sure, if I pay you your tenner and you don’t pay me mine, that’s a different story — but then there is no settlement netting at all. The only time one would wish to enforce settlement netting it must, ipso facto, have actually happened, so what do you think you’re going to court to enforce?
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- The JC’s famous Nutshell™ summary of this clause