EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions
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Cost of Carry in a Nutshell™
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Cost of Carry in all its glory
|Cost of Carry Amount
: Means an amount in EUR equal to:
- (a) the Cost of Carry Rate multiplied by:
- (i) in respect of an Allowance Forward Transaction, the Allowance Purchase Price multiplied by the Number of Allowances delivered on or before the Delayed Delivery Date following the occurrence of a Suspension Event; or
- (ii) in respect of an Allowance Option Transaction, the Allowance Strike Price multiplied by the Number of Allowances delivered on or before the Delayed Delivery Date following the occurrence of a Suspension Event;
- multiplied by:
- (c) the Cost of Carry Delay, divided by 360.
Cost of Carry Delay: Means the number of days in the period from (and including) the scheduled Payment Date to (but excluding) the Delayed Payment Date.
Cost of Carry Rate: Means a rate equal to the Floating Rate that would be determined for a Calculation Period commencing on (and including) the scheduled Payment Date and ending on (but excluding) the Delayed Payment Date, if the Reset Date were the last day of that Calculation Period and the applicable Floating Rate Option were “EUR-EONIA-OIS-COMPOUND”.
- (C) Suspension Event Delayed Performance: Subject to Part (d)(i)(5)(D)(Continuing Suspension Event) below, upon the Suspension Event ceasing to exist, both parties will be required to resume full performance of their obligations under this Agreement in respect of the relevant EU Emissions Allowance Transaction (including, for the avoidance of doubt, any suspended obligations) as soon as possible but no later than the day that is the earlier of: (i) the tenth Delivery Business Day following the date on which the Suspension Event ceases to exist; and (ii) 3 Delivery Business Days prior to the End of Phase Reconciliation Deadline (the “Delayed Delivery Date”).
- In the event that the Allowances to be Delivered are delivered to Receiving Party on or before the Delayed Delivery Date following the occurrence of a Suspension Event as contemplated by Part (d)(i)(5)(B)(Effect of a Suspension Event) above, Receiving Party agrees to pay Delivering Party on the Delayed Payment Date:
- (I) for the purposes of an Allowance Forward Transaction, an amount equal to the sum of: (X) Allowance Purchase Price multiplied by the Number of Allowances delivered on or before the relevant Delayed Delivery Date; and (Y) the Cost of Carry Amount; or
- (II) for the purposes of an Allowance Option Transaction, an amount equal to the sum of: (X) the Allowance Strike Price multiplied by the Number of Allowances delivered on or before the relevant Delayed Delivery Date; and (Y) the Cost of Carry Amount.
- For the avoidance of doubt, the Cost of Carry Amount shall be identified in the relevant VAT Invoice sent to Receiving Party.
Resources and Navigation
The definition of Cost of Carry Amount is more or less the same in all three emissions trading documentation regimes. Compare:
ISDA: Cost of Carry Amount
IETA: Cost of Carry Amount
EFET: Cost of Carry Amount
Interestingly, the ISDA and the EFET have a “default” Cost of Carry Provisions too (the ISDAs’ being labelled Close-out Cost of Carry Amount and so on, the EFET’s Default Cost of Carry Amount, but the IETA does not.
What is going on here, then?
Should there be a Suspension Event, the person meaning to deliver the Allowances, and receive cash payment on date X cannot, and will therefore start to get anxious emails from her treasury department. Remember, at this point she wants cash, has (Q.E.D.) no interest in the Allowances, and through no fault of her own is out of pocket.
Therefore the Seller agrees to pay her a Cost of Carry Amount. This is essentially interest at an agreed rate on the Cash Payment that was due, for the duration of the the Suspension Event.
The funny thing is what happens if the Suspension Event has not lifted by the Long Stop Date. Here the transaction is deemed to be irretrievably broken — and, per the consensus of Carbon Squad, the Transaction should therefore be cancelled and just forotten about. Any amounts already paid must be refunded (except where Allowances were delivered against those payments), and everyone walks away and pretends it never happened. This is the “then I woke up and it was all a dream” method of disruption resolution.
This we find utterly extraordinary. Your Cost of Carry Amount accrues ... accrues ... accrues ... and then suddenly in a puff of illogic, on a completely arbitrary Long Stop Date, it just vanishes, along with, presumably, all the rest of the money you stumped up in good faith to finance some other so-and-so’s Allowance obligations. What on earth were they thinking?
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Template:M sa EUA Annex Cost of Carry
- ↑ Since ISDA’s crack drafting squad™ elected to express a mathematical proposition on its own tortured prose, it is not entirely clear what is meant to be divided by 360: the stray comma suggests maybe it is meant to be a denominator for the whole sum, but we think it makes more sense to divide only the Cost of Carry Delay by 360, as that gets you an annualised day count fraction that the rest of the sum can be multiplied by. If you ignored the ambiguous comma, that is the most consistent with the paragraph layout.