Among the effects of the existing non-applicability of Financial Collateral Directive to the market activity involving spot emission allowances is the diversity of the national approaches in that regard and difficulties in assessing legal environment for cross-border transactions.
Conflict of laws
1. Any question with respect to any of the matters specified in paragraph 2 arising in relation to book entry securities collateral shall be governed by the law of the country in which the relevant account is maintained. The reference to the law of a country is a reference to its domestic law, disregarding any rule under which, in deciding the relevant question, reference should be made to the law of another country.
2. The matters referred to in paragraph 1 are:
(a) the legal nature and proprietary effects of book entry securities collateral;
(b) the requirements for perfecting a financial collateral arrangement relating to book entry securities collateral and the provision of book entry securities collateral under such an arrangement, and more generally the completion of the steps necessary to render such an arrangement and provision effective against third parties;
(c) whether a person's title to or interest in such book entry securities collateral is overridden by or subordinated to a competing title or interest, or a good faith acquisition has occurred;
(d) the steps required for the realisation of book entry securities collateral following the occurrence of an enforcement event.
Notably the current absence of uniform safeguards at a EU level against bankruptcy proceedings (Article 4(5) – ‘Member States shall ensure that a financial collateral arrangement can take effect in accordance with its terms notwithstanding the commencement or continuation of winding-up proceedings or reorganisation measures in respect of the collateral provider or collateral taker’ could be seen as an important handicap of collateral provided in the form of carbon credits.
Interesting observation is, moreover, that Article 9 (Conflict of laws) of the Financial Collateral Directive (see: box) is partly consumed by the newly inserted Article 10(5) of the Commission Regulation No 1193/2011 (the Registry Regulation). This provision foresees that ‘Accounts shall be governed by the laws and fall under the jurisdiction of the Member State of their administrator and the units held in them shall be considered to be situated in that Member State’s territory.’ The two regulations are visibly two different manifestations of the same legislative direction.
And why do I suggest that extending Financial Collateral Directive to spot emissions allowances trade could prop-up prices in the emission markets? Its rather simple casual link – while emission allowances are covered by the safeguards contained in the said Directive, EUAs will become more valuable collateral and it is probable that the demand for these instruments will rise (with effect on prices).