October 26, 2011

European Commission proposes legislation to bolster security in the carbon spot market

Filed under: climate, Europe — inece @ 9:01 pm

After completing an extensive review, the European Commission has proposed legislation to bring transactions for the immediate delivery of carbon allowances (spot trading) under the same stringent regulatory scheme for financial markets that already applies to other EU allowance  transactions, the vast majority of which consist of derivatives (futures, forwards, and options).

Citing repeated market abuses associated with the spot market for EU allowances (EUAs) and weak oversight mechanisms, the Commission seeks to enhance the overall transparency and integrity of the carbon market which is at the core of the European Union’s Emission Trading Scheme (EU ETS).  Classifying allowances as financial instruments would place them within the scope of the second Markets in Financial Instruments Directive (MiFID) and Regulation (MiFIR).  In addition, proposals for a new Market Abuse Regulation (MAR) and a Criminal Sanctions for Market Abuse Directive (CSMAD) specifically address insider trading and market manipulation issues. The combined MiFID/MAD regime would exempt individual ETS compliance buyers and certain other non-financial entities.

The Commission weighed the impacts of classifying emission allowances as financial instruments with the idea of creating a tailor-made regulatory system, taking into account the unique attributes that characterize allowances.  After engaging in a dialogue with industry leaders, Member States, carbon traders, and other stakeholders, the Commission concluded that the regulatory framework governing the secondary market for securities was closely aligned with those of the spot market for EUAs.  In addition, the fact that the lion’s share of carbon transactions automatically fell under the purview of EU financial regulation because of the high proportion of derivatives traded meant that considerable effort would be expended in administering a parallel system. Finally, the use of two systems might lead to conflicting and inconsistent regulation of transactions.  The inclusion of all EU allowance trading covered under the new regulatory regime is expected to provide the high level of integrity and stability that the ETS will require as reliable engine of economic growth.

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