German energy exchange EEX, which hosts the vast majority of the EU’s near-daily carbon allowance auctions, has called for changes to the sale process ahead of the introduction of the MSR.
The bourse on Friday published its submission to a European Commission public consultation on whether the regulations governing EU member state allowance auctions need to be amended.
The Commission in December said that when the MSR launches in 2019, the mechanism is expected alter the annual sale volumes, and therefore some changes to the process are needed.
The consultation ran from Dec. 22 until Mar. 15.
Below are the main recommendations from EEX’s submission:
- EEX called for the participation criteria to be reviewed. It said brokers and other financial players should be allowed to bid in order to improve liquidity and the market’s overall functioning. “Participation of brokers could also offer a simple method of participation in the auctions for small- and medium-sized enterprises, increasing their participation in the auctions,” it said. The bourse added that brokers could compete to aggregate demand from SMEs, and that the high security standards would be maintained by continuing to allow only regulated firms to partake.
- EEX said companies based outside the EU ETS region, for example in Switzerland or the US, should be allowed to participate as this would improve the auctions and strengthen the connection between these regions, facilitating future cooperation on carbon markets.
- EEX said that the current restriction on firms with less than a 51% share in an EU ETS operator was inappropriate, mainly because the holding company may often be responsible for managing the compliance needs of its minority shareholdings. It added that it has received several enquiries from potential bidders that could not participate due to the current criteria, and therefore it “seems to be too tightly defined.”
- EEX said transparent information should be provided for MiFID-exempted firms, and in particular, for their authorisation process, as these regulations differ between EU member states. “This leads to market distortion at the expense of potential bidders that seek access under this bidder category,” it said. At the very least, it added, a comprehensive list of responsible authorities, including the specific point of contact, in each country should be published and regularly updated. “This would support the market by ensuring participants have access to correct and timely information directly from the regulator in charge, [but] it would be even better if the additional authorisation effort would be waived, thus reducing the administrative burden for those bidders.”
- EEX said it would prefer to change the auction calendar cycle to September to August, as then the schedule would not need to be changed mid-year when the MSR begins to reduce auction volumes from Sept. 2019. EEX added that this would provide greater certainty for market participants.
- The bourse supported continuing the annual tradition of reducing auction volumes in August, when much of Europe goes on holiday. Data shows that oversubscription rates would be much lower in August than in the rest of the year in the absence of such cuts. In addition, August’s reductions “support the principle of non-discrimination between auction participants, as larger players with more resources may be easier able to cover the summer period.”
- EEX also said it should be assessed whether all relevant dates with potentially reduced demand should be taken into account, for example religious and national holidays on which sales are currently held.
BIDDING & VOLUMES
- EEX called for raising the auction’s minimum bid of 500 tonnes to align with the secondary’s market’s 1,000. “It would simplify trading in particular for those traders active on both the primary and secondary market, as it would facilitate for instance automatic deal capturing.”
- EEX said the current method for resolving tied bids has proven successful, as has clearing price calculation method.
- For EU aviation allowances (EUAAs), EEX said as it is a much more compliance-driven market than EUAs, it should be reflected in the auction calendar. “Instead of an even distribution of auction volumes across the year, offering higher volumes in the first quarter of the year may be more suitable. This is important to increase participation in particular given the relatively small size of the EUAA market.”
- EEX said the fee structure should be revised from the current system where only bidders pay, to a more flexible one where the costs are shared between the buying companies and selling governments. EEX added that the auction fees paid by bidders to the bourse, which are capped at the same level as secondary market fees, should be reviewed as they “do not reflect the much higher requirements for operating auctions in contrast to operating the secondary market.”
By Mike Szabo – firstname.lastname@example.org