Where to buy emission allowances: in the auction or on the secondary market
Friday, 21 January 2011 13:12


Assuming that a market participant is eligible for bidding in the auction (directly or indirectly), he will be – when the auctioning system begins operating in full - in the face of making economic decision: to participate in the auction or to buy allowances on the secondary market. The question may arise - considering only organisational and legal circumstances – which of these two markets (primary or secondary) offer – in principle - more advantageous conditions for bidders.

 


Such a comparison requires a number of assumptions, in particular some sort of generalisation and placing market actors on an equal footing, when – in a reality – they assume diverging investment strategies and adopt different trading positions. But, forgetting for a moment all these complications and diversity, and looking only at some principle premises, it should be taken into account that auctions are designed in such a way that – in comparison with the secondary market – they have at disposal:

 

- less diversified products: only two-day spot and five-day futures (forwards and futures will be available on the temporary only basis – see Article 4 of the Auctioning Regulation),

 

- no collateral, no guarantee of the date of supply – see Article 48 of the Auctioning Regulation and the box nearby.

Article 48

Late delivery of the auctioned allowances

1. Where the clearing system or settlement system fails to deliver the whole or part of the auctioned allowances due to circumstances outside its control, the clearing system or settlement system shall deliver the allowances at the earliest opportunity and the successful bidders or their successors in title shall accept delivery at that later date.

2. The remedy provided for in paragraph 1 shall be the sole remedy to which a successful bidder or its successors in title shall be entitled to in case of any failure to deliver auctioned allowances, due to circumstances outside the control of the clearing system or settlement system concerned.

 

Considering the legislative history of the Auctioning Regulation and the reasons given in the preamble thereto, this effect was entirely intended by the European Commission when adopting the Regulation. Auctions were not intended to compete with the secondary market but rather to complement it. It follows, however, that so awaited SME (small and medium-sized enterprises) participation in the auctions may be threatened because the above mentioned features (or shortcomings) of the auction design may be of mayor importance to SMEs. SME might need the tailor-made products and the guarantee of supply by the designated date, while both these attributes are lacking in the current auction design.

 

In this context the view that primary market is not able to compete with the secondary one, is really justified. In my view it can be expected rather a broad participation of financial intermediaries in the auctions than SME’s. But the one of decisive elements of the future trading decisions will be, in all likelihood, the level and the structure of fees applied by auction platforms and the clearing system or settlement system connected to them.

 

The recital 42 in the preamble to the Auctioning Regulation and the Article 51 thereof state that the structure and level of fees as well as any related conditions applied by any auction platform and the clearing system(s) and settlement system(s) shall be no less favourable than comparable standard fees and conditions applied on the secondary market. But considering the above mentioned shortcomings of the auctioning design it may occur not sufficient. To encourage broad participation in the auctions, the fees applied by the auction platform in my view should be more favourable than the ones applied on the secondary market (in order to compensate market participants for the lack of timely delivery guarantee and for the, limited by the Article 48(2), remedies).

 

 

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