Transcript Diapositive 1

Regulating carbon markets
The view of a CO2 exchange
Claire Dufour
University of Graz
25/11/2010
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What are the goals of the regulation?
Market Regulation has several objectives:
– Price discovery: market’s primary objective, the “price signal” is fundamental for
investment decisions;
– Transparency: have access to information with limited asymmetry of information;
– Prevent market abuse behaviors: insider trading, market manipulation, money
laundering and other frauds;
– Liquidity: best protection for the market participants, which justifies the need for a
variety of actors (liquidity providers are necessary for the market to be efficient);
– Market Surveillance: registration and control of intermediaries
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European CO2 market has successfully developed
within an incomplete regulation framework
Successful development of the market: liquidity, volatility, volumes
Derivatives traded on organized market (RM, MTF) covered by financial regulation (MiFID, MAD)
No regulation of the spot market and of part of the derivatives market (mainly OTC derivatives)
2010 YTD volumes and breakdown by trading type
Today:
6 000
Spot vi a brokers
–
Spot market represents 10% of the
transactions and 80% is done on
exchanges;
–
OTC forward with broker
intermediation: 20%;
–
Derivatives regulated market: 70%
with more than 1/3 done OTC clearing.
Spot on excha nges
5 000
Futures vi a brokers
Futures OTC Cl ea ri ng
Volumes in Mt
4 000
Futures on excha nges (s creen)
3 000
2 000
Tomorrow:
–
1 000
0
EUA
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Source: BlueNext
CER
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Introduction of a primary market on
EUAs with auctions
Room from improvement
There is a need to improve regulation framework to protect integrity (and hence
permanence) and effectiveness of CO2 market as an environmental instrument
– The Market Abuse Directive only applies to Regulated Market and not to Multilateral
Trading Facilities (contrary to MTF, Regulated Markets are have different requirements
in terms of organization and transparency such as the publication of the interim and
annual figures and publication of price-sensitive information);
– Fraud and money laundering have already materialized
The regulation framework must be adapted to the CO2 market rather than be an extension
of financial regulation:
–
Differences vs. classical financial markets make existing directives not fully adequate
–
Lack of regulation of major market participants (e.g. non-financial traders)
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French recommendations for harmonized appropriate
rules at EU level
Early 2010, French Government entrusted M. Prada, former chairman of the AMF, with the elaboration of
recommendations on the regulation of CO2 markets at EU level:
–
Supervision of market participants (registration) according to their activity type (compliance,
proprietary trading, third party trading)
–
Regulation of market infrastructures :
–
–
•
allow a regulated to have non financial instruments in order to benefit from MAD (Market
Abuse Directive) and MiFID (Market in Financial Instruments Directive) protection
•
control at the registry level
•
no recommendation to ban OTC
Implement adapted market abuse framework:
•
relevant definition of market manipulation, insider dealing, privileged information (e.g. the
position of a big utility cannot be communicated since it would give information to
competitors on the activity or investment strategy of the company : it cannot be considered
as privileged information unless it would lead to extreme asymmetry of information )
•
Possibility for regulators to set position limits (open positions)
Improved transparency on market fundamentals
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•
Need to improve regulatory information, visibility on market developments
•
Increase the frequency of disclosure of emissions data.
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Create an integrated supervision of the market, built
on existing regulation authorities (cdt)
Market Oversight:
–
Integrated supervision of the market : Primary and secondary, spot and derivatives, organised
markets and OTC
–
Regulation shall rely on existing authorities by establishing a cooperation between financial and
energy regulators. The role of each regulator must be defined:
• Financial: market surveillance, investigations, sanctions, market infrastructures supervision;
• Energy: fundamentals analysis and interaction with energy markets.
→
On October 22nd, 2010 the banking and financial French law was adopted enforcing the Prada
recommendations:
–
Non financial allowances can be traded on a regulated market
–
Extension of the relevant rules governing regulated markets to spot allowances trading: market
access (registration, KYC), market abuse rules…
–
Impose surveillance by both the AMF and CRE (Energy Regulatory Commission) on the analysis of
market fundamentals.
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European Regulation: creating a level-playing field
Auction Regulation: formally adopted on November 12th
– Only allows regulated market to tender for the organization Phase 3 auctions and
applies the relevant MAD rules to auctions.
– Stringent access rules (compliance operators, banks, financial institutions and nonregulated actors authorized by their national authority)
Registry Regulation:
– On the carbon market, registries play an important role, not only regarding the
transactions but also during the compliance process.
– New Registry Regulation (adopted on October 14th) sets new rules:
• On CERs surrendered for compliance;
• Stringent rules for the opening and monitoring of accounts on the EU registries
(right of refusal, national and European authorities – Europol, EU Anti fraud office –
may obtain data stored in the Registry).
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European Regulation: Phase 3 challenges
Regulatory framework to be defined quickly:
– global emission reduction objective in 2020 (20 or 30%);
– access to international credits (ban on HFC?);
– benchmarks definition;
– auctions (platform, quantity, calendar...)
Harmonize fiscal status by implementing the fiscal status recommended by the Commission
(reverse charge) in order to eliminate fiscal fraud
July 2010 : Commission launched the study “for examining whether the EU ETS allowances
market is sufficiently protected from market abuse, organizing the oversight of the
European carbon market and securing the market integrity of auctioning and trading” (based
on requirement of art. 12.1.a of EU Directive).
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Thank you for your attention!
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