From 1 July 2012 emissions units recognised under the Australian carbon pricing mechanism will be financial products under the Australian Corporations Act 2001. It means that carbon brokers and other intermediaries will need to examine whether they must hold an Australian financial services licence to be able to provide financial advice about, or deal in, carbon credits.
This regulatory switch precedes the EU MiFID II/MiFIR reform under EU legal framework and may be a training ground for European institutions.
In the context of MiFID II/MiFIR reform it is useful to observe how Australia’s carbon market implements legislation considering emission units as financial products (being to some extent an equivalent for financial instruments in the EU).
Secondary spot trading in emission allowances (“EUA”) isn’t currently regulated at the European level. The general approach consists in excluding emission allowances as financial instruments under Markets in Financial Instruments Directive (MiFID), but capturing derivative contracts based on such allowances (with the exception of Romania, where EUA’s were classified as financial instruments).
This approach changes with European Commission proposal on MiFID II/MiFIR released on 20 October 2011 to reclassify emission allowances as financial instruments under MiFID (for particulars see ‘MIFID II and emissions – consequences under preliminary investigation’).
In brief, the said U-turn means that as a rule, entities providing investment services specialising in emission allowances (e.g. reception and transmission of orders and their execution, safe-keeping and administration of clients' assets) would be required to hold a MiFID licence and comply with all MiFID organisational and operational requirements (including know-your-customer checks, transactions reporting, record keeping and investor protection rules). A substantial number of intermediaries currently lacking in MiFID authorisation for investment firms would, therefore, be required to ensure compliance with applicable organizational and operational requirements of the MiFID and to obtain such authorisation in order to pursue activity in secondary spot market for emission allowances.
This is, however, under EU ETS (with the above-mentioned exception of Romania) the potential issue for the future and depends on the further decisions and procedure for the final adoption of MiFID II/MiFIR legislation.
Financial products under the Australian legal framework
From 1 July 2012 emissions units recognised under the Australian carbon pricing mechanism will be financial products under the Australian Corporations Act 2001 (Corporations Act).
The main distinction with respect to international emissions units in the Australian market is the delineation for so-called ‘regulated emissions units’. These are emissions units that are recognised under the Clean Energy Legislative Package and include:
• carbon units;
• Australian carbon credit units (ACCUs); and
• eligible international emissions units (EIEUs).
Not all of these regulated emissions units are eligible for surrender by liable entities to meet their surrender liability under the carbon pricing mechanism. However, all emissions units recognised under the Clean Energy Legislative Package are financial products for the purposes of the Corporations Act.
The types of regulated emissions units that are financial products include all of the units that are eligible for surrender by liable entities to meet their surrender liability under the carbon pricing mechanism.
Additionally, some regulated emissions units that are not eligible for surrender by liable entities, but that may be used to meet commitments in voluntary carbon markets (i.e. voluntary cancellation of units), are also financial products. These include the types of ACCUs and EIEUs that are not eligible for surrender by liable entities to meet their surrender liability under the carbon pricing mechanism.
However, certain types of emissions units traded on certain international carbon markets are not included within the definition of EIEUs and so are not a financial product.
Australian financial services licensing regime relative to carbon brokers
Regulatory Guide 236 ‘Do I need an AFS licence to participate in carbon markets?’ issued by the Australian Securities & Investments Commission (ASIC) in May 2012 (http://asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg236-published-9-March-2012.pdf/$file/rg236-published-9-March-2012.pdf) provides a handful of useful information to help entities and individuals understand whether they require an Australian financial services (AFS) licence to provide financial product advice and other financial services in relation to carbon markets and emissions units.
ASIC will be responsible for regulating entities and individuals that provide financial services in relation to emissions units as well as for administering the Australian financial services (AFS) licensing regime, and keeping a register of AFS licensees.
This means that carbon brokers will be regulated by the Corporations Act, and will need to hold an Australian financial services licence to be able to provide financial advice about, or deal in, carbon credits. This also means that one may require an AFS licence to carry on another financial services business in relation to emissions units.
Pursuant to the cited Regulatory Guide 236 under the Australian financial framework individuals selling their own carbon credits or buying credits on their own behalf, however, do not need to hold a financial services license.