EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions
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Settlement Disruption and Suspension in a Nutshell™
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Settlement Disruption and Suspension in all its glory
(ii) Receiving Party shall promptly refund to Delivering Party any amount that may have been paid by Delivering Party in respect of an EU Emissions Allowance Transaction that is a Put (in each case, other than in respect of delivered Allowances) together with interest on that amount in the same currency as that amount for the period from (and including) the date that amount was paid to (but excluding) the date of termination of such EU Emissions Allowance Transaction, at the rate certified by the party required to refund the amount to be a rate offered to such party by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to be selected in good faith by that party for purposes of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in the relevant market.
[(I)][2] a Suspension Event continues to exist on the Long-Stop Date, then an [Additional Termination Event]/[Illegality] shall be deemed to have occurred in respect of which the relevant EU Emissions Allowance Transaction is the sole Affected Transaction [,]/[and] both parties are Affected Parties [and no Waiting Period will apply]. The parties agree that the Long-Stop Date will be the Early Termination Date for the purposes of the relevant EU Emissions Allowance Transaction. For purposes of determining any amount payable under Section 6(e) in respect of that Early Termination Date, it will be deemed that the parties had no further delivery or payment obligations in respect of the EU Emissions Allowance Transaction after the occurrence of the Suspension Event (other than in respect of any payment due by one party in connection with delivery obligations already performed by the other party); provided, however, that (i) Delivering Party shall promptly refund to Receiving Party any amount that may have been paid by Receiving Party in respect of the EU Emissions Allowance Transaction that is an Allowance Forward Transaction or a Call and (ii) Receiving Party shall promptly refund to Delivering Party any amount that may have been paid by Delivering Party in respect of an EU Emissions Allowance Transaction that is a Put (in each case, other than in respect of delivered Allowances) together with interest on that amount in the same currency as that amount for the period from (and including) the date that amount was paid to (but excluding) the date of termination of such EU Emissions Allowance Transaction, at the rate certified by the party required to refund the amount to be a rate offered to such party by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to be selected in good faith by that party for purposes of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in the relevant market.
The same event can be a Settlement Disruption Eventand a Suspension Event: both are events beyond the control of the counterparties and for which neither is at fault (in contrast to Failure to Deliver); however as Suspension Event is narrower, relating only to the failure of formal regulatory infrastructure in which the EUAs are held and registered, has priority over the wider Settlement Disruption Event (which would take in general market settlement issues) if the same event could otherwise be both.
Notification
Either party can notify a Settlement Disruption Event; only the party affected by a Suspension Event is required to give notice. Again, we suppose this has something to do with the more general nature of settlement disruption events.
Effect of event
In each case the practical upshot of the event is that the parties’ respective obligations are suspended. The parties have to try to overcome a Settlement Disruption Event; it being realistically beyond their gift to overcome a Suspension Event, they are not required to do that.
Delayed performance
Once the event is overcome the parties must resume their obligations: for a Settlement Disruption Event, within two Delivery Business Days; for a Suspension Event, within 10 Delivery Business Days — the fossil record does not reflect what the ’squad was thinking when it drew that distinction, but we must assume it was thinking something — for Suspension Events it underwent the exercise of crafting a tiresome waterfall of intermediate deadlines depending on whether the Suspension Event coincides with an End of Phase Reconciliation Deadline. You wouldn—t do that just for the giggles. Well, I wouldn’t.
The Suspension Event also contemplates an the cash payer paying an additional Cost of Carry Amount payment, and again the ’squad’s logic here does not leap off the page. If anyone happens to know, do write in.
“Continuing” Settlement Disruptions and Suspensions
Now things start getting properly baroque. Whether one is Suspended or suffering a Settlement Disruption, the ’squad contemplates the scenario where the disruption stretches out so far past the original scheduled Delivery Date that things have become ridiculous.
After that amount of time, of course, we must deal with the phantoms and succubi of unexpected reconciliation deadlines, End of Phase Reconciliation Deadlines and so on which, of course were hardly within the parties’ original contemplation, the original Delivery Date having been deliberately scheduled to fall before any of these could happen.
For a Suspension the period is a lot, but arbitrarily, longer — maybe six months, maybe eighteen, depending on when your event happens in the Compliance Period — but eventually one gets to the same place: an Illegality, and a forced termination.
But just wait: the oddest thing here is that, in either case, once we get to that “let’s call the whole thing off” point, the Transaction is just wiped from the horizon as if it did not exist. No close out amount, no replacement value, nothing like that: Any partially settled pre-payments must be returned (unless the corresponding EUAs that have actually been delivered), and the parties just sort of skulk away as if they had never transacted in the first place. This is a bit like an ipso facto clause, isn’t it?
We have to confess we don’t understand its logic, however you characterise it.
A person who has sold an Allowance — who economically has expressed the opinion that it wants out of this exposure, now, even if it will agree to finance its carrying cost until later — possibly for the precise reason that it may become unfashionable, hard to transfer, illiquid, or of lower than present value — finds that, because said asset having become hard to transfer, exactly like she thought it would, she now has to suck the whole thing up, wave away all those juicy sale proceeds, and she doesn’t even get compensated for the Cost of Carry Amount she thought she was entitled to.
Don’t follow that.
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↑If the form of Master Agreement in which this Part is included is a 1992 ISDA the parties should specify “Additional Termination Event” or, if the form of Master Agreement which the Confirmation supplements is an 2002 ISDA the parties should specify “Illegality”.
↑We think this number is superfluous, in that there is not a (II).
