In the article ‘The eligibility to apply for admission to bid in the auction pursuant to the Auctioning Regulation’ there were set out the basic principles for delineating the personal scope of entities granted the right to bid directly in the auctions (see Article 18 of the Auctioning Regulation). It follows that operators of installations and aircraft operators may only bid in the auctions on their own account, and, with some exceptions particularly for business groupings of operators (bidding on their own account and acting as an agent on behalf of their members), the only categories of potential intermediaries in the auctions are investment firms authorised under Directive 2004/39/EC and credit institutions authorised under Directive 2006/48/EC.
Besides, it is noteworthy to remind that another significant exception to the said rule represent commodity firms covered by exemption provided for in Article 2(1)(i) of Directive 2004/39/EC bidding on behalf of clients of their main business but the specific position of these firms in the auctioning context is referred to in greater detail in the above cited post.
Considering the procedure for making common auction platform operational are advanced (the UK opt-out auction platform as well) it is time to look into practical requirements flowing from the Auctioning Regulation as regards the financial institutions participation in the auctions, especially when the financials intermediate for account of their clients.
Further remarks are restricted only to investment firms authorised under Directive 2004/39/EC and credit institutions authorised under Directive 2006/48/EC (hereinafter referred to as ‘financials’) as intermediaries in the auctions. Referrals to ‘Articles’ mean the articles of the Auctioning Regulation (Commission Regulation No 1031/2010 of 12 November 2010 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 of the Council establishing a scheme for greenhouse gas emission allowances trading within the Community, OJ L 302, 18.11.2010, p. 1 as amended).
1. TWO-DAYS SPOT – NOT FOR ALL?
It should be reserved at the beginning that as regards auctioned products that are not financial instruments (that is - according to the current state of the MiFID Directive - two-days spot) Article 18(3) provides that financials are eligible to apply for admission to bid directly in the auctions on behalf of their clients provided that a Member State in which they are established has enacted legislation enabling the relevant competent national authority in that Member State to authorise them to bid on behalf of their clients.
The state of the compliance of Member States with this requirement is now unknown. It is probable however that not all Member States at present met the condition (it is theoretically also possible that in certain cases the condition is fulfilled but the data is lacking).
What does it potentially mean? The effect may be that the financials established in Member States not complying with the requirement concerned will not be eligible to apply for admission to bid directly in the auctions in two-days spot products on behalf of their clients. This will place the said financials at a competitive disadvantage with respect to their competitors established in Member States acting more far-sightedly and carefully.
To conclude this thread - financials established in Member States not displayed as complying with the Article 18(3) have reasons to be on the alert and should carefully monitor the situation.
The threat discussed here relates only to two-days spot products – and not five-days futures. If, thus in the procedure for choosing common auction platform (currently underway) wins the regulated market which does not offer two-days spot product, the said risk will not materialise. There are however potentially three other tenders for opt-out platforms: German, Polish, and UK...
2. OBLIGATION TO ENSURE THAT ALL CLIENTS DOWN THE CHAIN ARE ELIGIBLE TO APPLY FOR ADMISSION TO BID DIRECTLY IN THE AUCTION
This requirement has its legal base in Article 18(4). This provision states that where financials bid on behalf of their clients, they are required to ensure that those clients are themselves eligible to apply for admission to bid directly pursuant to the Auctioning Regulation. Where the clients of the persons referred to above are themselves bidding on behalf of their own clients, they shall ensure that those clients are also eligible to apply for admission to bid directly. The same shall apply to all further clients down the chain bidding indirectly in the auctions.
In this place it is necessary to refer to the general requirements for eligibility to apply for admission to bid directly. They are set out in Articles 19(1) and (2). It could be in brief generalised that members or participants of the secondary market organised by an auction platform that are eligible persons pursuant to Article 18(1) or (2) (click here to see this Article) will be admitted to bid directly in the auctions conducted by that auction platform without any further admission requirements.
The persons, who are not members or participants of the secondary market organised by an auction platform, however, must:
(a) be established in the Union, an operator or an aircraft operator;
(b) hold a nominated holding account;
(c) hold a nominated bank account;
(d) appoint at least one bidder’s representative;
(e) satisfy the auction platform concerned in line with applicable customer due diligence measures as to their identity, the identity of their beneficial owners, integrity, business and trading profile having regard to the means of establishing the relationship with the bidder, the type of bidder, the nature of the auctioned product, the size of prospective bids, and the means of payment and delivery;
(f) satisfy the auction platform concerned of their financial standing, in particular, that they are able to meet their financial commitments and current liabilities as they fall due;
(g) have in place or are able to put in place when requested, the internal processes, procedures and contractual agreements necessary to give effect to a maximum bid-size imposed pursuant to the Auctioning Regulation;
(h) give collateral in accordance with the Auctioning Regulation.
From the above provisions follows a conclusion that financials intermediating in the auctions of emission allowances of the third trading period will have to check whether their client meets the above points. The appropriate stipulations in agreements with clients providing for further examinations down the clients chain will also be necessary.
3. FURTHER OBLIGATIONS
The Auctioning Regulation in Article 19(3) further requires of financials submitting bids on behalf of their clients to be responsible for ensuring that all of the following conditions are fulfilled:
(a) their clients are eligible persons pursuant to Article 18(1) or (2);
(b) they have or will have in good time before the opening of the bidding window adequate internal processes, procedures and contractual agreements necessary to:
(i) enable them to process bids from their clients including the submission of bids, collection of payment and transfer of allowances;
(ii) prevent the disclosure of confidential information from that part of their business responsible for receiving, preparing and submitting bids on behalf of their clients to that part of their business responsible for preparing and submitting bids on their own account;
4. OBLIGATION TO ENSURE THAT CLIENTS COMPLY WITH THE REQUESTS MADE BY THE AUCTION PLATFORM
Article 20(7) An auction platform require an applicant for admission to bid in its auctions to ensure that clients of the applicant comply with any request made by the auction platform and that any client of the applicant’s clients does the same. The implementation of above point will require appropriate provisions in agreements between financials and their clients and, further, between clients and their clients.
The said requests from an auction platform refer to the provision that an auction platform may refuse admission to bid in its auctions if the applicant refuses any of the following:
(a) to comply with requests made by the auction platform for additional information or clarification or substantiation of information provided;
(b) to attend an invitation made by the auction platform to interview any officers of the applicant including at its business premises or elsewhere;
(c) to allow investigations or verifications, requested by the auction platform including on-site visits or spot-checks at the applicant’s business premises;
(d) to comply with requests made by the auction platform for any information required from an applicant, the clients of an applicant or the clients of their clients to check compliance with the above cited requirements for eligibility.
This short review refers only to some provisions of the Auctioning Regulation and does not encompass other requirements which may potentially be relevant and that may follow from other legal instruments.