A wobbly start to 2011 for the EU ETS

Not a great start to the year for the EU ETS market: Last week we had the suspension of all registries because of widespread phishing attempts, and an error at EU level that had market moving impact…

On Wednesday 19 January, the EU Commission suspended all the registries in the EU ETS, probably for at least a week, as a response to the escalating phishing attacks on registry accounts. Spot trading of EUAs/CERs/ERUs is, therefore, impossible and futures trades cannot currently be settled in the EU. The Commission, having seemingly failed to understand the impact on market confidence when the second theft was announced in December, finally responded when a third account holder reported that 475,000 EUAs were stolen from its account at the Czech emissions registry on Tuesday.  With that being at least the third such theft, and a number of other registries reporting other attempts to phish EUAs, it was clear that the EU Commission had to respond.

The Commission has indicated that the halt will last until 26 January but it is rumoured that some of the affected registries that have serious security issues may not be re-opened for some time afterwards. Contracting parties will need to take a view on how this situation will be treated under ISDA based contracts (whether they see it as a Suspension Event or a Settlement Disruption Event). Under IETA, parties will need to choose between a Suspension Event and Force Majeure.

Whilst confidence in the market since the suspension does not appear to have been greatly eroded so far, if a blanket closure lasts longer than a week the situation may change. A longer suspension period may trigger contractual termination provisions for certain trades and participants should think about whether to try to avoid close out if the relevant registries are not up and running by the end of the requisite period (1 February/2 February).

While the Commission can force registries to improve access security, it is much less clear what it can do in relation to the allegedly stolen EUAs. That may take more time to resolve, but IETA has asked Member States to provide a legal opinion on whether operators can use such EUAs for compliance and what is the legal status of such EUAs. This is a difficult question from a legal perspective, and Member States may struggle to answer rapidly.

The list of the ID numbers of the most recently stolen EUAs is available at http://link.reuters.com/van27r