The suspension of spot trading in EU ETS allowances (EUAs) and CERs/ERUs, which came into force on 19 January 2011 and was due to end today, has been extended. The current suspension is the longest disruption in EU ETS history, and follows a series of cyber attacks on the EU ETS registry system, where computer hackers have accessed systems and illegally transferred emissions allowances between accounts.
The suspension includes the internal or external transfer of EUAs between account holders in the EU ETS registries. National registries will only be able to resume trading when they provide the Commission with an independent report confirming that the agreed minimum security requirements are in place. The first reports are expected to be submitted in the next few days. The Commission has stated that it will provide updates and give 24 hours' notice before national registries are re-activated.
Reasons for extending the suspension of trading
Despite the Commission having proposed the introduction of enhanced security measures in 2010, the Commission has indicated that 14 of the 30 EU ETS registries (ie, the 27 EU Member States plus Iceland, Liechtenstein and Norway) may not have taken all recommended security measures. Several Member States have claimed that improving security is costly.
Recent thefts of allowances have revealed deficiencies in the security of some national registries, but also show that the security and integrity of the EU ETS is vital to the operation of the carbon markets.
An announcement made by the Commission on 25 January 2011 stated that Member States and the other countries affected by the suspension have endorsed the Commission's actions and agreed on guidance for the minimum requirements that each national registry has to meet in order to resume normal operations. Registries that fail to introduce the agreed security measures will have their trading activity suspended indefinitely.
Financial impact of the thefts
The most significant theft occurred recently, when hackers stole 475,000 EUAs, worth around €7 million, from the Czech Republic's registry account, which were then cashed on the spot markets within minutes. The theft from the Czech account represents the largest incidence of fraud connected to EU ETS allowances, but follows several other attacks on registry security. These include cyber attacks on trading accounts in Poland, Greece and Estonia within the last couple of weeks, and on a government holding account in Austria, announced on the same day as the Czech security breach. The total value of these thefts has been estimated to be €30 million.
In the past, the EU ETS has been subject to a multi-billion VAT fraud, the re-sale of used carbon credits, and a phishing scam. In March 2010, trading was briefly suspended following concerns about Hungarian registered CERs (our e-bulletin dated 20 April 2010 gives further details).
Impact on trade
The suspension of the spot market has not prevented trading on the futures market, which usually accounts for 80% of total trading activity. However, trading in futures was at about half the normal level when the suspension was imposed, perhaps indicating a wariness to trade in the wake of the theft from the Czech account. The benchmark price of EUAs also dropped by three cents.
The fate of stolen allowances
EU ETS market participants have expressed concern that the security breaches may mean that they are the recipients of stolen allowances, which may have to be forfeited, leaving them at a financial disadvantage.
Member States will be responsible for clarifying the status of the stolen allowances; including whether the original owner may claim them back. The International Emissions Trading Association has stressed the importance such a clarification has, as legal, including criminal, consequences may result from the status given to the stolen EUAs: for instance, in the UK, criminal liability is potentially incurred when handling stolen goods, for money laundering and aiding criminal acts.
Impact on IETA and ISDA contracts
Despite traders and contracting parties being unable to implement security measures themselves, EU ETS market participants should consider how the suspension affects their contracts. For example, the suspension may be deemed to be a "suspension event" or "settlement disruption event" under ISDA contracts, or a "suspension event" or a "force majeure" event under IETA contracts. It is also possible that the suspension may trigger termination provisions in contracts, should it continue for a certain duration.
Parties should seek legal advice in relation to their EU ETS contracts.
Single register from 2013
The Commission believes that the security discrepancies between national registries will be eliminated by the introduction of a single central EU ETS register from 2013, which will also see security measures centralised and put in the hands of the Commission.