Guangdong becomes China’s first carbon market to green-light OTC forward trading

Published 10:03 on February 3, 2016  /  Last updated at 10:06 on February 3, 2016  /  China, China's Offset Market, China's Pilot Markets  /  No Comments

The Guangdong emissions exchange on Wednesday became the first in China to release rules for forward trading in carbon, though all deals must be negotiated over the counter (OTC) as screen-based forward trading is banned in the country's regional pilot schemes.

The Guangdong emissions exchange on Wednesday became the first in China to release rules for forward trading in carbon, though all deals must be negotiated over the counter (OTC) as screen-based forward trading is banned in the country’s regional pilot schemes.

The exchange published the rules on its website in a bid to formalise a practice that, according to sources, some market participants have been doing informally.

Under the rules, parties can negotiate forward trades of Guangdong Emissions Allowances (GDAs) and Chinese Certified Emissions Reductions (CCERs). The agreement must be reported to the exchange, and the transactions will be settled by the bourse on the delivery date.

With some market participants executing forward trades without reporting them to the exchange, the main motivation behind the rules appeared to be improving the bourse’s oversight of the market and to blacklist any traders who default on contracts.

Observers told Carbon Pulse the rules are probably flexible enough to not be covered by the national ban of forward trading in carbon markets, which has left the seven regional ETS’ confined to spot deals only – a factor most experts say has hindered liquidity.

One analyst who wished to remain anonymous said the rules probably come too late to impact trade in the Guangdong market, as most traders interested in dealing in forward contracts are shifting their focus towards the national ETS, which is due to begin in 2017.

“There would probably be some interest in forward CCERs. There are some larger power companies already looking for CCERs for the national ETS,” another observer said.

“But it is a good thing they released this, because compliance companies need official documents to be confident enough to trade,” he added.

Officials at the Hubei carbon exchange have said they too are in the process of drawing up rules for forward trading.

Other elements of Guangdong’s forward trading rules are:

– Parties must be members of the exchange.
– Parties are encouraged to set aside a certain amount of money and/or GDAs/CCERs as collateral in a depository account held by the exchange, though this is not mandatory.
– Any forward contract’s delivery date must be at least 10 days in the future.
– The exchange will regularly publish forward trading data, though it did not specify how frequently.
– The exchange will not take responsibility for any losses from potential disputes.

By Stian Reklev – stian@carbon-pulse.com

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