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2007 EFET General Agreement
Version 2.1(a) (Power)
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4 in a Nutshell™
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§ 4 Primary Obligations for Delivery and Acceptance of Allowances. For the purpose of Allowance Transactions, § 4 of the General Agreement is hereby amended by: (i) deletion of § 4.1 ( Delivery and Acceptance) in its entirety and replacement with the new § 4.1 ( Delivery and Acceptance and Scheduling Obligations) below; (ii) additions to the definition of “Schedule” found in § 4.2 ( Definition of Schedule); (iii) the addition of a new § 4.3 ( Physical Settlement Netting); and (iv) the addition of a new § 4.4 ( Payment for Allowances) as follows:
- § 4.1 Delivery, Acceptance and Scheduling Obligations.
- (a) Seller shall Schedule, sell and Transfer to Buyer, or, if applicable in accordance with the relevant provision of § 4.1(a)(i) and 4.1(a)(ii), cause to be Transferred, and Buyer shall Schedule, purchase and accept Transfer of, or, if applicable in accordance with the relevant provision of § 4.1(a)(i) and 4.1(a)(ii), cause such Transfer to be accepted, the Contract Quantity at the Delivery Point, and the Buyer shall pay to the Seller the relevant Contract Price. Unless the Parties otherwise agree, the Seller shall Transfer the Contract Quantity at the Delivery Point during a Delivery Business Day between the hours of 10:00 a.m. and 4:00 p.m. CET and any Transfer taking place at a time after 4:00 p.m. CET on a Delivery Business Day shall be deemed to have taken place at 10:00 a.m. CET on the next Delivery Business Day.
- (i) For any Allowance Transaction in which no Transfer Point has been specified by the Seller, the Seller shall Transfer, or cause the Transfer of, the Contract Quantity to the Delivery Point from any Holding Account in any Registry.
- (ii) Parties may limit the scope of their Transfer and acceptance of Transfer obligations by designating one or more specific Delivery Points and/or Transfer Points for any Allowance Transaction:
- A. If one or more Delivery Points are specified by the Parties in respect of an Allowance Transaction, the Seller’s obligations shall be limited to the obligation to Schedule, sell and Transfer to Buyer, or cause to be so Transferred, and the Buyers’s obligations shall be limited to the obligation to Schedule, purchase and accept Transfer of, the Contract Quantity at the Delivery Point(s) so specified.
- B. If one or more Transfer Points are specified by the Seller in respect of an Allowance Transaction, the Seller’s obligations shall be limited to the obligation to Schedule, sell and Transfer to Buyer and the Buyer’s obligations shall be limited to the obligation to Schedule, purchase and accept Transfer of, or cause to be accepted such Transfer of, the Contract Quantity from the Transfer Point(s) so specified.
- C. Where a Party, in its capacity as Buyer, has specified one or more Delivery Point(s), the other Party will, without delay, nominate each such Holding Account(s) specified by the Buyer as a 'trusted account' (for the purposes of the Registries Regulation) for each of its own Transfer Points.
- (b) Where the Parties have agreed upon a list of multiple Delivery Points and/or multiple Transfer Points for an Allowance Transaction:
- (i) the Delivery Points so specified shall be deemed to be listed in descending order of preference such that the Delivery Point for the Allowance Transaction shall be the first Holding Account so listed, unless the Seller is prevented from Transferring to that Delivery Point by an event which would be either an event of Force Majeure or a Suspension Event if that were the only Delivery Point specified by the Party affected by the event, in which case the Delivery Point shall be the next listed Delivery Point that can accept Transfer of Allowances, until such list of Delivery Points has been exhausted; and
- (ii) Seller shall have discretion to Transfer to Buyer the Contract Quantity on the Delivery Date from any one or more of the Holding Accounts which have been specified as Transfer Points in respect of Seller; provided, however, that where the Seller is prevented from Transferring from a Transfer Point by an event which would be either an event of Force Majeure or a Suspension Event if that were the only Transfer Point specified by the Party affected by the event, the Seller shall select another listed Transfer Point from which to Transfer the Contract Quantity to the Buyer on the Delivery Date, until such list of Transfer Points has been exhausted;
- (c) Where the Parties have agreed upon a list of multiple Transfer Points and/or Delivery Points for an Allowance Transaction:
- (i) Buyer may later:
- A. amend the order of preference in which the Delivery Points are listed; and/or
- B. nominate an additional Delivery Point;
- provided that, in each case, Buyer notifies Seller no less than thirty (30) calendar days prior to the relevant Delivery Date and Seller consents thereto in writing on or before the day that is five (5) Delivery Business Days after receiving such notice from Buyer; and
- (ii) Seller may later:
- A. nominate an additional Transfer Point without Buyer’s consent provided that Seller notifies Buyer of such nomination in writing on or before the day that is ten (10) Delivery Business Days prior to the relevant Delivery Date.
- (d) For the avoidance of doubt, specifying Delivery Point(s) and/or Transfer Point(s) in respect of any particular Allowance Transaction for purposes of this § 4.1 need not preclude the Parties from designating different Holding Accounts than the Physical Settlement Netting Accounts specified for the purposes of § 4.3 (Physical Settlement Netting) in Part II of this Allowances Appendix.
- § 4.2 Definition of Schedule. The following words are added to the end of the last sentence of § 4.2 (Definition of Schedule): “For the purposes of Allowance Transactions, the definition of Schedule shall include, in accordance with Applicable Rules, those actions necessary for Parties to comply with all obligations and requirements contained in the Applicable Rules, including, without limitation, the standards of the relevant Emission Trading Scheme(s) and Registry requirements in order to ensure that all their respective Holding Accounts are properly established, and that all of their respective applicable requirements for effecting Transfer from Seller to Buyer at the applicable Delivery Point are met. The Parties acknowledge and agree that customary industry practices shall include, to the extent it has not already done so, each Party notifying the other at least thirty (30) calendar days prior to the Delivery Date of its Holding Account(s), (including account number details in a specified Registry) for, as applicable, its designated Transfer Point(s) or Delivery Point(s).”
- § 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.
- § 4.4 Payment for Allowances. In respect of each Individual Contract, the Buyer shall pay the Seller for the Delivered Quantity in accordance with the provisions of § 13 (Invoicing and Payment).
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Comparison
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Overview
The settlement and delivery section of the EFET Allowances Appendix is balanced rather haphazardly between Clauses 4 and Clauses 6. Since, being the efficient soul he is, the JC has endeavoured to commentate collectively on the three master agreements governing the emissions market, the way this commentary is organised might seem a bit weird. Do not blame me. Blame EFET’s Carbon Squad.
Summary
Much of this, we feel, is configuring a sale or option contract in an underlying that is more like a financial instrument than a commodity into the wiring of a master agreement that is designed to cater for the sale and trading of power, which is a curious type of commodity in that it doesn’t have an articulated unit, but is a free-flowing source of energy measured more by its volume. This all this business about nominating Delivery Points and Transfer Points doesn’t really make a lot of sense when you are delivering a dematerialised certificate from one custody account to another, and not sending volts through an electricity grid.
4.1 Delivery, Acceptance and Scheduling Obligations
Settlement (ISDA), Scheduling (EFET), Primary Obligation (IETA) — the core provision that sets out who pays what, where and to whom, for Option Transactions and Forward Transactions.
The JC is no great fan of definitions, but God only knows, in the ISDA one would have come in handy here. You know, a “Purchase Amount” for Forward Transactions, or a “Strike Amount” for Option Transactions (or a “Payment Amount”, for both) might have been nice, given they are the key concepts in Option Transactions and Forward Transactions.
As for “Allowances to be Delivered” — okay, there is at least a term for the physical half of that, but it’s rubbish. What about “Delivery Amount”?
There is a distinction between the “Number of Allowances” — effectively the notional size of the whole trade — and the “Allowances to be Delivered” — the portion of it that is settling on any given day. The difference is that American options can settle in part, on any day in the term of the Transaction. Forwards typically don’t — they all settle on a pre-agreed settlement date
(To be fair to the Emissions ninjas at IETA, they do have this concept: “Contract Amount”).
Well, the JC has introduced these words into the nutshell summary to make life a bit easier to follow. Just remember they are not there in the real thing. Unless you put them in.
Cash Settlement: Trick question. There is no provision for cash-settlement in the emissions trading world. Will that stop counterparties asking you to specify a settlement method? Probably not. Does it matter? Also probably not. What if you want a cash settlement option? Not out of the ballpark — one’s eligibility for EMIR, and as such hedge exemptions, might depend on whether the forward is able to be cash-settled, in theory, or not. (There is no good reason for this: it springs from the paranoid brow of those toiler legal counsel who trying to parse the eligibility or Emissions derivatives under the refitted delegated regulations of MiFID 2 — our advice is just don’t go there — but you just never know.)
Delivery Points and Transfer Points
In order to shoehorn the Emissions product into the EFET Master Agreement architecture — being a power and gas trading document, it thinks in terms of grid injections and inputs and outputs to a set network of pipes and cables — the EFET Allowances Appendix calls the Holding Accounts “Delivery Points” (for the Seller’s Holding Account) and “Transfer Points” for the Buyer’s Holding Accounts). It also, variously, calls them Holding Accounts too, by the way, but worth mentioning.
Transfer from a specified Holding Account
Curious conditionality, across all three versions, where the Buyer specifies a Holding Account from which Allowances must be delivered, and not just the account to which they must be delivered. Quite why it should matter whence the Allowances come we cannot say — a vague fretfulness about theft perhaps? — but ok; let’s run with it.
Note, in any case, its moderation in IETA (5.2) whereby one has an obligation to make sure there are sufficient allowances in your account to satisfy your delivery obligation. So even though you can’t be forced to deliver from anywhere else, you can be sued for losses arising from your failure to ensure there was something to deliver in your Holding Account. All rather cack-handed, but in “fundamental upshot” terms, this does get to the right place.
The transfer is done once the Allowances hit the Seller’s account (I know, I know: you don’t say.) But wait: there is an interesting use of the word “whereupon” here, upon which we dwell in a bit more detail in the premium section.
(That “whereupon” is in Clause 6.1 of the EFET Allowances Appendix, by the way.)
4.2 Definition of Schedule
This is mostly throat clearing stuff, though there is an odd appeal to parties being bound by customary market practice to comply with a 30 calendar day notice requirement to designate a Holding Account. Which is all fine, but, look, EFET Allowances Appendix you are a bilateral contract. You impose notice periods contractually. If you want to stipulate a fixed number of days’ notice, just say it: there is no value in also referring to it being “customary market practice”. What happens if customary market practice changes?
Instead of:
The Parties acknowledge and agree that customary industry practices shall include, to the extent it has not already done so, each Party notifying the other at least thirty (30) calendar days prior...
Wouldn’t it have been better to say either:
“The Parties will give at least as much notice as is customary market practice...”
If the document is happy to defer to customary market practice, whatever that may be, or:
“The Parties will give at least 30 calendar days’ notice ...”
if it is not?
4.3 Physical Settlement Netting
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:
Section 2(c) is about “settlement” or “payment” netting — that is, the operational settlement of offsetting payments due on any day under the normal operation of the Agreement — and not the more drastic close-out netting, which is the Early Termination of all Transactions under Section 6.
If you want to know more about close-out netting, see Single Agreement and Early Termination Amount.
We wonder what 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 differently.
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 happened, so what do you think you’re going to court to enforce?
4.4 Payment for Allowances
Go see clause 13.
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See also
Template:M sa EFET Allowance Annex 4
References