Emissions Anatomy

EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions Go Premium Top Trumps®Financial Weapons of Mass Destruction® 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 ᐅ to expand: ISDA Emissions TOC EUA Annex - Premium Emissions 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 ISDA: EU Anatomy • EU Wikitext • EU Nutshell (premium) • UK Anatomy • UK Wikitext (to be merged into EU Anatomy) IETA: IETA Master Agreement • IETA Wikitext • IETA Nutshell (premium) EFET: EFET Allowances Appendix • EFET Allowances Wikitext • EFET Nutshell (premium) Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.

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.

For Europhiles

For Little Englanders

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

Part [•]. UK 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 UK ETS (d)(v) Invoicing (d)(vi) Requirements under the UK ETS (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 (e) Defined Terms and Interpretation Administrator Event Affected Allowance Aircraft Operator Allowance Allowance Forward Transaction Allowance Option Transaction Allowance Purchase Price Allowance Shortfall Allowance Strike Price Allowance Type Allowances to be Delivered Applicable Rules Buyer Buy-In Buy-In Period Calculation Agent Call Close-out Cost of Carry Amount Close-out Cost of Carry Delay Close-out Cost of Carry Rate Compliance Deadline 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 DPRC Shortfall EEP Amount EEP Non-delivery EEP Payment EEP Risk Period Encumbrance Loss Amount End of Trading Period Compliance Deadline ETS Order Excess Emissions Penalty/EEP Expiration Date Final Compliance Date Final Delivery Date First Trading Period Indemnifiable EEP Long-Stop Date Multiple Exercise No Encumbrance Obligation Notice of Exercise Number of Allowances Number of Options Operator Holding Account 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 Registry Registry Operation Relevant Authority RPRC Shortfall 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 VAT VAT Amount VAT Invoice VAT Jurisdiction Written Confirmation