Buying allowances in the auctions versus on the secondary market - pros and cons
- Category: Auctions of CO2 allowances
Collateral posted by an unsuccessful bidder – when refunded and what interest rate applied?
The problems of the lesser weight, but nevertheless important for some categories of bidders, may be the lack of the certainty with regard to the Regulation arrangements related to the term for the refund by the auction platform of any unused collateral posted by an unsuccessful bidder (together with any interest accrued on cash collateral).
Pursuant to the Article 49 of the Regulation prior to the opening of the bidding window for the auctioning of two-day spot or five-day futures, bidders or any intermediaries acting on their behalf, are required to give collateral. This in itself is some sort of imbalance in mutual relations between the bidders (which are required to give collateral and are subject to remedial measures in the event of default) and auction platform (which are not). This imbalance can be further observed in specific arrangements on, so important, time limits and interest rates.
The Regulation only states in that regard that any unused collateral shall be released ‘as soon as practicable’ after the close of the bidding window – that is exactly when? The legal measure at issue unfortunately does not specify how many days the auction platform can maximally retain the unsuccessful bidder’s monies. When it comes to big volumes, very active bidders can be in this way exposed to liquidity risks. This risk is, furthermore, exacerbated by the ambiguity as to the interest rate to be applied on such refunded cash collateral.
Let’s hope that these uncertainties will be cleared in the future contracts appointing auction platforms.