Does the ICE Futures Europe Circular 11/038 of 10 March 2011 mean that the trader that was delivered by the Clearing House and the Exchange “prohibited” emission allowances has no legal remedies against the seller? Such a rule would be difficult to accept from the position of legal interests of the buyer as a party to the agreement. It seems that in the said document there are also other points that should be carefully considered.
Recent thefts of emission allowances from registries added legal risks to trading in EUAs, CERs and ERUs but after announcing by the ICE Futures Europe on 10 March 2011 of the Circular 11/038 the situation seems to be even more difficult. Pursuant to the said Circular the Exchange and Clearing House decided jointly to publish a list of serial numbers of EUAs, CERs and ERUs which are not acceptable for delivery (the ‘Prohibited List’ or ‘List’). The List is to be available and will be updated by the Exchange at its website.
The question of disclosure of serial numbers of (allegedly) stolen allowances is one of the problems to be discussed during the ECCP stakeholder meeting on ETS registry security and stolen allowances scheduled for 15 March 2011. The European Commission does not so far decided to disclose the said numbers and in the schedule of the above-mentioned meeting observed that “some serial numbers of allegedly stolen allowances have been disclosed in some form, without there being a court judgment establishing that a theft has indeed taken place”. It further noted that current registry rules do not regulate the disclosure of serial numbers, while data on transfers are subject to strict confidentiality for a period of 5 years. According to the Commission, before the relevant provisions are placed in the forthcoming amendment of the Registries Regulation the following issues should be considered:
- if public disclosure of serial numbers of (allegedly) stolen allowances be allowed, who should be authorised to disclose serial numbers of (allegedly) stolen allowances,
- what conditions should be met before any disclosure of serial numbers of (allegedly) stolen allowances, and
- who should be held liable for erroneous or falsified disclosure of serial numbers.
These questions are important and the potential answer is complicated by the multinational character of the emissions market. The issue is closely linked to the general civil and administrative matters mainly regulated so far by the national laws of the Member States.
There is no surprise that the ICE Futures Europe decided – by means of the cited Circular - to clear its own situation in the face of legal uncertainties of such a scale. But while safeguarding the position of the Exchange and the Clearing House the interests of traders should not also be omitted. The new rules announced by the said Exchange seem, however, to be excessively severe for market participants from the point of view of their legal interests. It should also be considered whether the rules provided for in the said Circular are free from certain inconsistencies taking into account the necessary balance of the interests of trading parties.
The first thing is that the members and clearing members are reminded by the Exchange of their obligations in relation to their unencumbered title to assets transferred to the Clearing House. As is stated in the said Circular, exchange members and energy clearing members who do not have good title to EUAs, CERs or ERUs will be liable to the Clearing House and Exchange for their losses.
The same rule seems, however, not to be binding on the Exchange and the Clearing House because pursuant to the said document “neither the Clearing House nor the Exchange makes any warranty or representation that any EUA, CER or ERU delivered by it to any Clearing Member will not subsequently be or become eligible to be included on the Prohibited List. Neither the Clearing House nor the Exchange shall be obliged to take any step in respect of any such delivered EUA, CER or ERU”.
Does this mean that the trader that was delivered “prohibited” emission allowances by the Clearing House and the Exchange has no legal remedies against the seller? Such a rule would be difficult to accept from the position of legal interests of the buyer as a party to the agreement.
Introducing such a rule is also surprising in the context of the content of another Circular of the ICE Futures Europe no. 10/034 of 22 April 2010 which – in relation to the “Affected EUAs” (which were also the subject of “phishing” incidents during January 2010 affecting the registries for European Union emissions allowances) - reads:
“1. Transactions made to or through the Clearing House in relation to the Affected EUAs are to be treated as valid.
2. No restrictions are to be imposed by the Exchange or the Clearing House on deliveries to or from the Clearing House of Affected EUAs. Exchange Members or Clearing Members that are buyers (or their appointed transferees) must receive delivery of Affected EUAs under cleared futures contracts where such EUAs are allocated to them in accordance with the Clearing House’s delivery procedures”.
The “Prohibited List” includes EUAs designated in previous circulars as ‘Affected EUAs’. But the Exchange makes the reservation that the inclusion of the Affected EUAs on the “Prohibited List” does not affect the validity of any previous transaction in Affected EUAs.
In the light of the foregoing it follows that the trader had so far no legal means to object to the delivery by the Exchange and the Clearing House of Affected EUAs. It nevertheless means that after such a transaction the buyer has a big problem with these EUAs because now, according to the Exchange Circulars the opposite rule will be binding on the participants: no Clearing Member are allowed to transfer any EUA, CER or ERU on the Prohibited List (‘Prohibited Instrument’) to the Clearing House. The transfer of any Prohibited Instrument to the Clearing House (or of any instrument which becomes a Prohibited Instrument prior to the Clearing House’s transfer of that instrument to a buyer) shall not discharge a Clearing Member’s obligation to make delivery of an EUA, CER or ERU.
Clearing Members shall be also obliged to transfer an additional EUA, CER or ERU, as applicable, which is not a Prohibited Instrument, to the Clearing House: (i) if they deliver a Prohibited Instrument to the Clearing House; or (ii) if an EUA, CER or ERU was not a Prohibited Instrument at the time of transfer to the Clearing House but becomes a Prohibited Instrument prior to its transfer by the Clearing House to a buyer.
For each such Prohibited Instrument, the Clearing Member in question must deliver within the original delivery timetable one acceptable EUA, CER or ERU (as applicable) that is not and does not become a Prohibited Instrument. A Clearing Member will be treated as having made a failed delivery if it fails to do this within the required timeframe. This obligation applies even if the Clearing House has made on-delivery of the Prohibited Instrument in question to another Clearing Member.
The obligation imposed on the Clearing Member to deliver within the original delivery timetable EUAs, CERs or ERUs that are not and do not become a Prohibited Instrument raises questions whether such a performance is in principle possible in a current general situation. As was recalled at the beginning, the issue whether to publicly disclose the serial numbers of stolen allowances is now only analysed by the relevant authorities.
How to deal with the Affected (Prohibited) EUAs which are bought in good faith for value, in reliance on the seller’s obligation to deliver EUAs with good title, still remains a problem first a foremost to the simple buyers and sellers in emissions market.