Emissions Anatomy

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EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions
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Emissions Allowance.png

Emissions Allowance

Wanna stop frying the planet? Start here. Will it help? Who knows? The forward curve is in contango: who cares!

Docs Take your pick: IETA, ISDA or even EFET: none of them good. But at least you have flexibility in mediocrity 4
Amendability Nope. The EU can amend them, but you can’t. 0
Collateral They aren’t anyone’s obligations as such. In fact, they’re more like a sort of unofficial, made up, (hush) crypto. No credit risk! DNA
Transferability With an account at the Union Registry, sure! 7
Leverage Not unless you do a CEmO, and we just made that up. 0
Fright-o-meter Not directly scary as long as there is an EU with Greta Thundberg in it, but global warming is going to lead to Armageddon so, you know, indirectly. 5

Index: Click to expand:

Pro tip: for tons of information about EU ETS and EU financial services regulation see Michał Głowacki’s magnificent emissions-euets.com website.

Emissions trading documentation

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Here is the JC’s latest Anatomy™: ISDA’s emissions annex, which comes in at least two flavours: the original EU Emissions Anatomy, and the new, copycat, we absolutely-are-not-going-through-separation-anxiety, UK Emissions Anatomy. These documents are special in that they are the creature of that permanently marginalised ISDA’s crack drafting squad™ splinter group, the Carbon Squad™. These quasi-fundamentalist drafting weirdos, with all their neo-First Method, “and then I woke up and it was all just a dream” nonsense, don’t often get a look in, but ISDA’s overlords seem to have swtiched off the dash-cams and looked the other way on this occasion, and these bad-boys of carbond have not wasted the opportunity.

For practitioners, this is heady stuff: working out which tracts of the annex are dangerous, extremist nonsense and which are practical allocations of risk in a new and sui generis asset class is an exhilarating, seat-of-the-pants, experience.

The annexes function as sort of add-ons to the 2005 ISDA Commodity Definitions, which you access by adding a new Part with some elections to the Schedule to your ISDA Master Agreement. This is also some cross-grading into the 2006 ISDA Definitions, and you may find yourself hankering wistfully for the dear old 2002 ISDA Equity Derivatives Definitions too, if hedging disruption is something that keeps you awake at night.

Now. In our humble opinion, the level of rigour, diligence and just plain old common sense, however pedantically articulated and tediously applied, we have come to expect when beholding a new weapon from the great ISDA FWMD foundries just feels missing in action for these Emissions Annexes. Oh, fear not: pedantry and tedium abound close-up: ISDA’s crack drafting squad™ knows no boundaries when it comes to labouring what ought to be obvious, and they have spared no innocents here. But back off a few feet to beyond a bigger picture — matters of substance, not form — and you may feel Carbon Squad™ has taken some positions which strike us as being eccentric, were we to put it kindly, and utterly barking mad were we to be speaking candidly among friends.

Seeing as ISDA’s crack drafting squad™ has now duped the original EU version — the UK version is, as you would expect a very close lift — then the original has acquired some inertia. Change one and you much change both. We doubt there will be much appetite. Pity. We don’t quite understand why ISDA didn’t combine these into a single, generic annex. The amount of divergence needed to cover both regimes is very little, and perhaps it was the opportunity to re-visit the original approach and come up with something that sits a little more comfortably with the usual ISDA approach to valuing and terminating derivative transactions.

Now the blame for some of this miscomprehension may well be laid at the JC’s door: we read this cold, without the benefit of having seen its evolution, and without much knowledge of the market, much less competing products (the International Emissions Trading Association’s master agreement, for example). We’ll maybe get on to that. So he may be missing some subtlety.

But we don’t think so: those experts to whom we have spoken are all abut shoulder-shruggy about this document, and sort of mumble that we're struck with it, since a couple of key market participants are now quite attached to it.

It seems the market has taking to amending and adapting the terms of the Annex wholesale, rather than treating it as an inviolable canon, as is usually the ISDA way. So what you are faced with might not much resemble what you find here. But we offer it for what it is worth anyway.

ISDA EUA Annex EFET Allowances Annex IETA Master Agreement

Part [•]. EU Emissions Allowance Transactions
(a) Scope
(b) ISDA Definitions
(c) Multiple Delivery Dates
(d) Terms

(d)(i) Physical Settlement
(d)(i)(1) Settlement
(d)(i)(2) Delivery
(d)(i)(3) Netting
(d)(i)(4) Settlement Disruption Event
(d)(i)(5) Suspension Event
(d)(ii) Failure to Deliver
(d)(ii)(1) Failure to Deliver by Delivering Party
(d)(ii)(2) Failure to Comply by Receiving Party
(d)(ii)(3) EEP Amount
(d)(iii) Partial Settlement
(d)(iv) Abandonment of Scheme
(d)(v) Invoicing
(d)(vi) Requirements under the Scheme
(d)(vii) No Encumbrances
(d)(viii) Value Added Taxes
(d)(ix) No Consequential Loss
(d)(x) Other Fees and Expenses
(d)(xi) Failure to Deliver (Alternative Method) - EEP Applicable
(d)(xii) Specified Holding Accounts and Modifications of Party’s Specified Holding Accounts

(e) Defined Terms and Interpretation
Administrator Event
AEUA Allowance or AEU Allowance
Affected Allowance
Aircraft Operator
Allowance
Allowance Forward Transaction
Allowance Option Transaction
Allowances to be Delivered
Allowance Purchase Price
Allowance Shortfall
Allowance Strike Price
Allowance Type
Appropriate Source
Buyer
Buy-In
Buy-In Period
Calculation Agent
Call
Central Administrator
Central European Time
Close-out Cost of Carry Amount
Close-out Cost of Carry Delay
Close-out Cost of Carry Rate
Cost of Carry Amount
Cost of Carry Delay
Cost of Carry Rate
Deadline Shortfall
Delayed Delivery Date
Delayed Payment Date
Delivering Party
Delivering Party’s Delivery Business Day Location
Delivering Party’s Replacement Cost
Delivery Business Day
Delivery Date
Directive
DPRC Shortfall
EEP Amount
EEP Non-delivery
EEP Payment
EEP Risk Period
Encumbrance Loss Amount
End of Phase Reconciliation Deadline
EU
EU Allowance
EUTL or European Transaction Log
Excess Emissions Penalty/EEP
Expiration Date
Final Compliance Date
Final Delivery Date
Fourth Compliance Period
Holding Account
Indemnifiable EEP
Linking Agreement
Long-Stop Date
LTSL
Member State
Multiple Exercise
National Administrator
No Encumbrance Obligation
Notice of Exercise
Number of Allowances
Number of Options
Operator
Option
Option Entitlement
Original Affected Party
Payment Date
Potential Exercise Date
Premium
Put
Receiving Party
Receiving Party’s Delivery Business Day Location
Receiving Party’s Replacement Cost
Reconciliation Deadline
Registries Regulation
Registry
Registry Operation
Relevant Authority
Relevant Registry
RPRC Shortfall
Scheme
Seller
Seller Business Day
Settlement Disruption Event
Shortfall
Specified Compliance Period
Specified Holding Account
Suspension Event
Trade Date
Third Compliance Period
Unauthorised Transfer
Undelivered Allowances
Union Registry
VAT
VAT Amount
VAT Invoice
VAT Jurisdiction
Written Confirmation

I. General Terms
§ 1 Subject of Allowances Appendix
§ 2 Definitions and Construction
§ 3 Concluding and Confirming Allowance Transactions
§ 4 Primary Obligations for Delivery and Acceptance of Allowances

§ 4.1 Delivery, Acceptance and Scheduling Obligations
§ 4.2 Definition of Schedule
§ 4.3 Physical Settlement Netting
§ 4.4 Payment for Allowances

§ 5 Primary Obligations for Options (as per EFET General Agreement)
§ 6 Delivery, Measurement, Transfer and Risk
§ 7 Non-Performance Due to Force Majeure and Suspension Event
§ 8 Remedies for Failure to Transfer or Accept
§ 9 Suspension of Delivery (as per EFET General Agreement)
§ 10 Term and Termination Rights
§ 11 Calculation of the Termination Amount
§ 12 Limitation of Liability
§ 13 Invoicing and Payment
§ 14 VAT and Taxes
§ 15 Floating Prices and Fallback Procedure for Market Disruption (as per EFET General Agreement)
§ 16 Guarantees and Credit Support (as per EFET General Agreement)
§ 17 Performance Assurance (as per EFET General Agreement)
§ 18 Provision of Financial Statements and Tangible Net Worth (as per EFET General Agreement)
§ 19 Assignment (as per EFET General Agreement)
§ 20 Confidentiality (as per EFET General Agreement)
§ 21 Representation and Warranties
§ 22 Governing Law and Arbitration
Annex 1 Defined Terms
Administrator Event
AEUA
Affected Allowance
Aircraft Operator
Allowance
Allowances Appendix
Allowance Type
Allowances Termination Amount
Allowance Transaction
Applicable Rule(s)
Appropriate Source
Central Administrator
Compliance Period
Compliance Year
Contract Price
Contract Quantity
Cost of Carry Amount
Cost of Carry Calculation Period
Cost of Carry Rate
Default Cost of Carry Amount
Default Cost of Carry Calculation Period
Default Cost of Carry Rate
Delayed Delivery Date
Delivery Business Day
Delivered Quantity
Delivery Date
Delivery Point
Delivery Schedule
Directive
Encumbrance Loss Amount
End of Phase Reconciliation Deadline
Emissions Trading Scheme(s
EU
EUA
EU ETS
EU ETS Directive
EUR-EuroSTR-COMPOUND
EUTL or European Union Transaction Log
Excess Emissions Penalty or EEP
Excess Emissions Penalty Equivalent or EEP Equivalent
Expert
Fourth Compliance Period
Holding Account
Index Cessation Effective Date
Index Cessation Event
Long Stop Date
Loss
Member State
National Administrator
Negotiation Period
New Tax
Non-Member State
Non-Taxed Party
Operator
Original Affected Party
Other Tax
Participating Agreement
Paying Party
Payment Cycle
Physical Settlement Netting Accounts
Receiving Party
Reconciliation Deadline
Registries Regulation
Registry
Registry Operation
Relevant Authority
Relevant Registry
Rules
SE Affected Party
SE Affected Transaction
Suspension Event
TARGET Settlement Day
Tax
Taxed Party
Third Compliance Period
Total Contract Price
Transfer
Transfer Point
Unauthorised Transfer
Undelivered EEP Amount or UEA
Union Registry
Unpaid Amounts
Value Added Tax or VAT
II: Elections for customization of provisions in the Allowances Appendix

1 Subject of Agreement
2 Interpretation and Construction
3 Confirmation Procedure
4 General Obligations, Representations and Warranties
5 Allowance Transfers
6 Effecting Transfers
7 Option Transactions
8 Effect of Option Exercise
9 Billing and Payment
10 Euros
11 Taxes
12 Transfer or Acceptance Failure
13 Force Majeure and Suspension Event
14 Termination
15 Confidentiality
16 Assignment
17 Liabilities
18 Miscellaneous
Schedule 1 Definitions

Account Pair
Administrator Event
Affected Allowance
Affected Party
Affected Tax Party
Affiliate
Aircraft Operator
Allowance
Allowance Price
Allowance Type
American Option
Appropriate Source
Automatic Exercise
Aviation EU Allowance
Banking Day
Base Rate
Bermudan Option
Buyer
Buy-In
Buy-In Period
Call Option
Central Administrator
Central European Time
Change in Tax Law
Confidential Information
Confirmation
Contract Amount
Contract Value
Control and Profit Transfer Agreement
Controlling Party
Cost of Carry Amount
Cost of Carry Calculation Period
Cost of Carry Rate
Credit Rating
Credit Support Document
Credit Support Provider
Cross default threshold
Default Quantity
Defaulting Party
Delayed Delivery Date
Delayed Payment Due Date
Delivered Allowance Volume
Delivered Allowances
Delivering Party
Delivering Party’s Delivery Banking Day Location
Delivering Party’s Holding Account
Delivering Party’s Replacement Cost
Delivery Banking Day
Delivery Date
Directive
Early Termination Date
EEP Amount
EEP Status
Encumbrance Loss
Entity
EU Allowance
EU ETS Rules
EU ETS
EU
EURIBOR
Euro
European Option
EUTL
Event of Default
Excess Emissions Penalty
Exercise Period
Expert
Expiration Date
Expiration Time
Final Delivery Date
FM Affected Party
FM Affected Transaction
Fourth Validity Period
Force Majeure
GHG Reductions
GHG
Holding Account
Illegality Affected Transactions
Illegality Affected Party
Illegality
Indebtedness
Letter of Credit
Long Stop Date
Loss
Market Amount
Market Quotation
Agreement
Material Adverse Change
Member State
Member State Registry
Monthly Billing Cycle
National Administrator
No Encumbrances Obligation
Non-Defaulting Party
Operator
Option Transaction
Option
Original Affected Party
Participation Agreement
Party
Payment Due Date
Performance Assurance Provider
Performance Assurance
Period Traded Allowance
Physically Netted Allowances
Positive Mark to Market Amount
Potential Exercise Day
Premium
Premium Payment Date
PTA Quantity
Put Option
Receiving Party
Receiving Party’s Delivery Banking Day Location
Receiving Party’s Holding Account
Receiving Party’s Replacement Cost
Reconciliation Deadline
Reference Market Maker
Reference Price
Registries Regulation
Registry
Registry Operation
Registry Pair
Relevant Authority
Relevant Change in Tax
Relevant Entity
Relevant Registry
Relevant Tax
Replacement Allowances
Replacement Transactions
Requesting Party
Required Authorisations
Schedule
System
Seller
Shortfall
Specified Period
Specified Transaction
Statement Amount
Statement
Strike Price
Suspension Event
Tangible Net Worth
Termination Currency
Termination Payment Date
Termination Payment
Total Debt
Trade Date
Transaction
Transfer Request
Transfer
Unauthorised Transfer
Undelivered Allowances
UNFCCC
Union Registry
Unpaid Amounts
Validity Period
Validity Period Reconciliation Deadline
Value Added Tax or VAT

Schedule 2 Agreement Information (Elections)
Schedule 3A Form of Confirmation for Spot/Forward Transactions
Schedule 3B Form of Confirmation for Option Transactions