Template:M summ EUA Annex Settlement Disruption and Suspension

Priority

The same event can be a Settlement Disruption Event and 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 Settlement Disuption Event, at the end of an unseemly short period — it’s complex, but in any case not longer than nine Delivery Business Days after the original Delivery Date — an “Illegality” Termination Event will be deemed to occur.

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.