The Article 45(3)(a) of the draft of the Commission Regulation on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances pursuant to Directive 2003/87/EC of the European Parliament and the Council establishing a scheme for greenhouse gas emission allowances trading within the Community (Auctioning Regulation) provides for different method for calculating interest for defaulted payments than commonly accepted contractual standards.
The Article 45(3)(a) of the Auctioning Regulation stipulates that “A bidder in default of payment may be charged interest for each day beginning with the date on which payment was due ... and ending on the date on which payment is made ...”.
The method for calculation of interest in the event of default of payment is commonly regulated in agreements. For instance the ISDA 2002 Master Agreement in Section 9(h)(i)(1) (Interest on Defaulted Payments) stipulates that: “If a party defaults in the performance of any payment obligation, it will, to the extent permitted by applicable law and subject to Section 6(c), pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as the overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment (and excluding any period in respect of which interest or compensation in respect of the overdue amount is due pursuant to clause (3)(B) or (C) below), at the Default Rate.”
The same rule is in ISDA standard applied to the calculation of interest on deferred payments (Section 9(h)(i)(3)(A)).
The method for calculation of interest indicated in the abovementioned provisions of the 2002 ISDA Master Agreement is not bizarre, because the same rules are adopted in other standards common in the carbon market such as IETA and EFET.
As an instance the clause 6.1.1. of the IETA Master Agreement can be taken:
“... the Delivering Party shall pay to the Receiving Party interest on an amount equal to the Contract Price multiplied by the number of Compliance Period Traded Allowances not Transferred to such Receiving Party's Holding Account by the Delivery Date for the period from (and including) the Delivery Date to (but excluding) the actual date of Transfer to the Receiving Party at the rate specified in clause 8.5(a) (Interest)”. The same mechanism is applied in the definition of Cost of Carry Calculation Period, the definition of Receiving Party Replacement Cost and point 8.5 (a) – relating to rules on the contract interest rate).
Such a method for calculation of interest could therefore be deemed as an established, common practice in this market.
The method provided for in the cited Article 45(3)(a) of the Auctioning Regulation is also different from some national legislative instruments (for particulars see: “The method of accruing interest under the IETA Master Agreement and the Polish Civil Code”).
The problem lies not only with the necessity to adapt the requisite software on the part of potential bidders in the future auctions. It is easy to calculate that “interest for each day beginning with the date on which payment was due ... and ending on the date on which payment is made ...” (compounded according to the draft of the Auctioning Regulation) involves one extra day accounted for interest when compared with the analogous methods applied by IETA, ISDA and EFET Master Agreements standards as well as national provisions such as the Polish Civil Code. To conclude, I suppose, however, that the amount of interest for one day does not count so much as all these complications and lack of harmonisation in that matter.
Why the draft of the Auctioning Regulation provides for different rules as regards the problem at issue – it is not easy to answer. The recitals to the legal instrument in question do not include neither the explanation nor any clues.