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EU Plan May Lead to Cash-Settled CO2 Futures, Barclays Says

A European Union plan to boost the security of the spot carbon market may lead to more cash settlement of futures contracts, said Barclays Plc.

The proposal to impose a 24-hour delay in the transfer of carbon permits may slow the settlement of futures, the biggest part of the market, Trevor Sikorski, an analyst in London at Barclays Capital, said today by phone. That’s because a futures contract can trade many times during its life, he said.

“There will be chains of transactions that have grown up around the derivative products,” Sikorski said. “It would be reckless and unfortunate for the European Commission to distort the operation of the forward market to try and solve a problem in the much smaller spot market,” he said in a research note.

The EU proposals May 5 sought to better protect the bloc’s carbon-registry from fraud and abuse after thieves roiled the market during the past year. The proposed regulation on the EU registry, which is slated to start operating next year, include the 24-hour delay as well as a plan to make serial numbers of carbon permits invisible to market participants.

The futures market makes up about 85 percent of carbon trading. There’s 464 million metric tons of open interest on the ICE Futures Europe exchange in London, according to data from the exchange.

‘Stolen Property’

Hiding serial numbers may make trading riskier, not more secure, because regulators may force registries to publish who has bought stolen allowances, Sikorski said in the note. “It means buyers cannot take steps to identify stolen EU allowances once a theft has been reported as there is no way of ensuring what you are buying is not stolen property.”

Trading in the region’s spot carbon market halted for 15 days earlier this year after computer hackers improperly transferred about 4 million allowances valued at about 67 million euros ($96 million) at today’s price on the BlueNext exchange in Paris of 16.73 euros a ton as of 5 p.m. local time. Permits fell 0.3 percent and have jumped 20 percent in the year to date.

To contact the reporters on this story: Mathew Carr in London at m.carr@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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