Exchanges and MTF


An important exception to this rule relates to carbon derivatives traded on exchanges and MTF.  The said products - also if physically settled - are under the full scope of MiFID and harmonised throughout the EU. The legal basis for this qualification establishes

the Article 38(3)(b) of the cited Commission Regulation No 1287/2006.

 

This provision generates an interesting situation - the contract, conditions of which qualify it, in the common opinion, as “strictly spot”, becomes a financial instrument when comes up to the exchange. This is the case with the Daily Futures of the ECX.

 

The Article 38(2) of the cited Commission Regulation No 1287/2006 defines a spot contract as “contract for the sale of a commodity, asset or right, under the terms of which delivery is scheduled to be made within the longer of the following periods:

(a) two trading days;

(b) the period generally accepted in the market for that commodity, asset or right as the standard delivery period.”

 

In the said definition is also added that “However, a contract is not a spot contract if, irrespective of its explicit terms, there is an understanding between the parties to the contract that delivery of the underlying is to be postponed and not to be performed within the period mentioned in the first subparagraph.” but this addition has no significance for the purposes of conclusions of this article.

 

EUAs and CERs Daily Futures contract specifications

 

Looking from the perspective of this definition at the detailed EUAs and CERs Daily Futures contract specifications of the product listed on the ECX exchange, one can be confused, because this specifications read:


1. Contract is a Daily Contract. Only one Daily Contract is listed at any one time with a Contract Date of that on which trading occurs,


2. The Contracts are physically deliverable,

 

3. Delivery is between Clearing Members and ICE Clear Europe during a Delivery Period. The Delivery Period is the period beginning at 18:30 hours on the Contract Date and ending at 19:00 hours on the second Business Day following the relevant Contract Date.

 

So, the physical delivery and the term for it ending within two business days indicate that the contract – if not traded on the exchange – would be qualified as a classical spot and not the financial instrument.

 

But such a conclusion would not be correct. The classification of EUAs and CERs Daily Futures as a financial instruments is supported - apart from the abovementioned Article 38(3)(b) of the Regulation No 1287/2006 - by the following arguments:

 

1. ICE Clear Europe will act as central counterparty to all trades and guarantees the financial performance of the ICE Futures Europe contracts registered in the name of its Members (see to that effect the Article 38(1)(b) of the Regulation No 1287/2006 in conjunction with the Article 38(3)(c) thereof);


2. Margin & Payment - the Buyer will pay full contract value by 09:00 on the first Business Day following the relevant trade date. A separate Variation Margin payment/call will be made by 09:00 on the first Business Day following the relevant trade date and the Seller will pay Seller Security by 09:00 on the first Business Day following the relevant trade date. A separate Variation Margin payment/call will be made by 09:00 on the first Business Day following the relevant trade date in order to reflect the profit/loss on the contract (the argument about margining also refers to the Article 38(1)(b) of the Regulation No 1287/2006 in conjunction with the Article 38(3)(c) thereof);


3. The contract is standarised (see in that sense the Article 38(1)(c) of the Regulation No 1287/2006 in conjunction with the Article 38(3)(c) thereof);

 

4. The ECX expressly describes the product as “ICE FUTURES ECX CARBON FINANCIAL INSTRUMENTS” (see in that sense the Article 38(1)(a)(ii) of the Regulation No 1287/2006 in conjunction with the Article 38(3)(c) thereof).