It could presumably contribute to strengthening the liquidity in the emission allowances market and prop-up ailing prices if the safeguards provided for in the Financial Collateral Directive were extended to carbon instruments.
Also emitters could gain advantage from such a legislative action.
Financial Collateral Directive and MiFID II review - spot emission allowances trade excluded
MiFID II Directive classifying emission allowances as financial instruments is currently the subject of negotiations between European Parliament and the Council. The effects of such regulatory change will be far-reaching (see: MIFID II and emissions – consequences under preliminary investigation and Consequences of the new MAD Regulation regime for inside information for the emission allowances market – the threshold decisive).
It is noteworthy that while there is intention that the EU financial-market measures cross-referring to the MiFID like:
- Market Abuse Regulation and Criminal Sanctions for Market Abuse Directive;
- Anti-Money Laundering Directive;
- Settlement Finality Directive
also be applicable to transactions and other market activity involving spot emission allowances potentially classified as financial instruments, concurrently spot emission allowances trade would fall outside the scope of:
- Prospectus Directive,
- Transparency Directive,
- Undertakings for Collective Investment in Transferable Securities (UCITS) Directive;
- Financial Collateral Directive (see the answer to the Question 14 - MEMO/11/719 of 20 October 2011).
Especially with respect to Financial Collateral Directive (Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (OJ L 168, 27.6.2002, p. 43 as amended) – hereinafter ‘Financial Collateral Directive’) this approach seems to be lacking in consequence.
Possible extension of the Financial Collateral Directive and its safeguards to emission allowances would be particularly important to clearing houses that accept emission allowances as collateral.
Mechanisms provided for in the Financial Collateral Directive can be seen as introduced in the interest of collateral takers and generally favouring them but from the other point of view they can foster liquidity in the emissions market and facilitate collateralisation of transactions by smaller market participants lacking in possibilities for more costly ways of collateralisation.
Emitters of greenhouse gases could use their EUAs resting unproductively on the emissions accounts in the registry till the EU ETS settlement date (30 April) for safeguarding transactions in different products, amongst others energy. Some of them are doing this already.
The problem in question gains particular importance in view of incoming EMIR requirements for risk mitigation measures in OTC derivatives market (see: ‘Contentious collateral in EMIR draft technical standards’).
Review of the provisions of Financial Collateral Directive against carbon-collateral usability
Reviewing the provisions of Financial Collateral Directive against carbon-collateral usability criteria indicates that the majority of body of this legal act could be applied (in particular Article 4 Enforcement of financial collateral arrangements, Article 5 Right of use of financial collateral under security financial collateral arrangements, Article 6 Recognition of title transfer financial collateral arrangements, Article 7 Recognition of close-out netting provisions, Article 8 Certain insolvency provisions disapplied and Article 9 Conflict of laws).