Environmental Engineering Reference
In-Depth Information
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Long-term hedging strategies create de-
mand for futures trading well in advance
of the third trading period. By definition,
supply and demand - i.e. short and long
side of the market - in futures markets is
not limited. Assuming that the market has
confidence in the supply schedule of the
underlying emissions allowances, hedgers,
speculators and intermediaries should al-
ways provide sufficient liquidity to trade a
liquid forward curve. Expectedly, second-
ary futures markets should be able to pro-
vide the required liquidity well in advance
of the third trading period without the ad-
dition of futures auctions.
ment liquidity. Hence, from economic efficiency
perspective it is advisable to reuse secondary
markets infrastructure to the broadest extent pos-
sible in order to minimize and control platform
and operations costs.
There is competition at all layers in secondary
markets. This ensures cost efficiency and con-
tinued service, process, and product innovation.
In such a set up, it would be at the discretion of
market participants and Member States to choose
the most efficient venue at which to auction.
Imposing and hardwiring a single platform for
auctioning top down would obviously not be
supportive of competition. The competitive and
decentralized bottom up approach taken to build
up the secondary market architecture based on
the existing infrastructure and institutions seems
more appropriate.
As regards infrastructures capable of imple-
menting auctions, several institutions qualify.
Running and clearing electronic auction markets
is one of the core competencies of secondary
market infrastructure providers like for example
exchanges. Hence, using secondary market venues
would also be the approach of choice to minimize
implementation risk and cost. The fast and smooth
introduction of on-exchange spot and futures
auctioning in Germany is a good example. From
adoption of the legislation end of May 2009 it
took just seven months to select the auctioning
venue, build the functionality and getting started
beginning of January 2010.
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If nothing else, auctioning futures is also
seen as a means to mitigate the operational
risks and lack of confidence in the timely
readiness of registries to issue emission
allowances. To remedy this uncertainty,
there have been considerations on auction-
ing alternative forward instruments like
non-fungible futures, securitized term con-
tracts or notes guaranteeing future delivery
at preset prices. But all such instruments
would distract liquidity from the incum-
bent secondary markets. They would natu-
rally trade at a discount and, thus, lower
the proceeds from auctioning.
Recommendation 2: Auctions should be imple-
mented by using the existing secondary
market infrastructure and institutions
Recommendation 3: Auctions and secondary
markets should have a common regulatory
framework
At first glance, setting up a single centralized
auctioning platform with a dedicated compli-
ance, collateralization and settlement regime
maximizes liquidity in auctions whilst also being
cost-efficient. In practice, such a start-from-scratch
approach inevitably duplicates existing market
infrastructure and networks already in place.
Beyond infrastructure costs, market participants
would have extra cost to gain connectivity, set
up processes, provide collateral and fund settle-
The interdependencies between auctioning
and secondary markets with regard to market
manipulations and abuse have been highlighted
above. Therefore, it is recommendable that the
new regulation on auctioning seamlessly interacts
with existing secondary market regulations and
oversight on the institutional and market level.
