03/12/2008
NYMEX European Union Allowance (EUA) Futures Contract:
The NYMEX European Union Allowance (EUA) Futures Contract references the UK Emissions Trading Registry (UK Registry) as the standard delivery mechanism. The UK Registry was selected due to its open access to domestic and international market participants. The NYMEX European Union Allowance (EUA) Futures Contract references Phase 2 EUAs for standard delivery. The first European Union Emissions Trading Scheme (EU ETS) Phase 2 annual compliance dateline is in April 2009. On February 28, 2008, DEFRA, operator of the UK Registry, issued a statement which indicated that Phase 2 allowances would not be issued until the International Transaction Log (ITL), operated by the United Nations Framework Convention on Climate Change, is electronically linked to the European Community transaction log (CITL). Under the Kyoto Protocol, signatory nations are required to link national registries to the ITL. These links enable compliance processes related to the Kyoto Protocol. The European Commission has not provided a firm date as to when the link will be operative for delivery. The lack of a date related to the link has increased uncertainty related to EU ETS forward contracts and resulted in delivery extension provisions in the NYMEX EUA futures contract.
NYMEX Certified Emission Reduction (CER) Futures Contract
At present, CERs are held in Clean Development Mechanism (CDM) temporary accounts. Transfers from the CDM accounts are effected by the ITL. At present, the ITL is only electronically linked to the Japan emissions registry. Until the ITL is electronically linked to the CITL, CERs cannot be transferred into European national emission reduction registries such as the UK Emissions Trading Registry and the Netherlands CO2 Emissions Trading Registry included in the standard delivery mechanism of the NYMEX futures contract. Commercial sources have indicated that the ITL/CITL link will be in place no later than April 2009.
The possibility that the ITL may not be linked to the CITL in a time frame compatible with the December 2008, the first contract to be listed for the EUA and CER futures contracts, has required the development of a mechanism for standard delivery extension. Under the revised EUA and CER delivery process, termination of trading would take place on the second to last business day of the month preceding the delivery month (e.g. December 2008). If the ITL and the CITL had not been linked as of an applicable contract month termination date, NYMEX would implement the following procedures.
Standard Delivery Extension Procedures
The NYMEX Clearinghouse would not require the filing of any Notice of Intention to Accept ("NOIA") or Notice of Intention to Deliver ("NOID") from Clearing Members with open positions (long and short, respectively) until NYMEX confirms that the link between the ITL and the CITL becomes operational, thus allowing standard delivery to occur. When NYMEX confirms that the link has been established it would issue a formal advisory to the market stating the revised dates for filing of NOIA's and NOID's, Notice Day, and delivery. As a note, although trading would terminate, this proposal would nonetheless allow individually negotiated exchange of futures for Physical or Swap ("EFP" and "EFS") transactions to be submitted up to and until the delivery match had been communicated to the respective counterparties. Thus, EFP and EFS transactions would enable market participants to close positions following the termination of trading and during the period before ITL/CITL linkage. Please note that consistent with other NYMEX contracts, EFP and EFS transactions executed after expiration of trading cannot establish a new position for both buyer and seller. Thus the result of any EFP or EFS will serve to either reduce the total open delivery commitment (offset for both buyer and seller) or result in no change to the total delivery commitment (offset for one party, new position for other).
During the intervening time until the link between the ITL and CITL becomes operational, the NYMEX Clearinghouse would continue to operate daily variation margin processes to ensure the integrity of clearinghouse financial risk management. During this period, variation margin would be based on price information obtained by the NYMEX staff from OTC brokers and other commercial sources. As noted earlier, following confirmation that the ITL and CITL link was operational, the NYMEX Clearinghouse will conduct the delivery match and provide the Delivery Notices to the respective Clearing Members. Following the conveyance of the notices, the seller will be required to deliver EUAs and CERs respectively, to the buyer ten (10) NYMEX business days from the date that the ITL/CITL link had become operational.