—Overall trading activity and evolution in time

By Mathew Carr

March 28-29, 2022: From regulatory report March 28, 2022: The chart below (Figure 50 in the report published below) shows the total number of transactions by country in the EU carbon market — and it’s surprising.

Regulator ESMA (European Securities & Markets Authority) was looking to see if the carbon market was working properly. It seems to be, it concluded, though it made 12 policy recommendations — see below.

Market prices rose to their highest for a month.

The trading execution is concentrated in the NDEX trading venue in the Netherlands (~85%) (on ICE) and pertains largely to buyers and sellers that are located in the United States, the UK, the Netherlands and Germany. There is a presence of trades from counterparties in Switzerland and the Cayman Islands (6.8% and 6% of total transactions respectively).

ESMA: Cayman Islands entities are mainly other non-financial entities (3.3%) and funds (2.6%) over all transactions. The largest EU countries are Netherlands [NL] (12.25%) and Germany [DE] (11.41%) which come after the US (25.86%) and the UK (24.98%).

More than a tidbit:

Interesting tidbit from the ESMA report:
The largest share of EUA derivatives positions (33%) is held by firms based in Germany (largest EU emitter & economy). Not surprising.

But after that, 2nd-ranked US (14%) + 5th Australia (5%) + 7th Caymans (4%) make up ~ 1/4 of total mkt. https://t.co/As0OPDgFRg

— 🇺🇦Mike Szabo🇺🇦 (@MikeSzaboCP) March 28, 2022

Policy recommendations

ESMA puts forward the following policy recommendations:

1. Extending position management controls to trading venues trading derivatives on emission allowances.
2. Adapting position reporting in emission allowances.
3. Amending the account structure at the Union Registry to allow for the identification of individual EUA account holders so that the Union Registry can be used as a data source for market monitoring and transparency for market participants.
4. Publishing weekly position reports on open positions in futures on emission allowances only in addition to the current combined reports on open positions in futures on emission allowances and options on futures on emission allowances.
5. Providing further clarity to market participants regarding counterparty classifications in weekly position reports.
6. As part of the RTS 2 review underway, ESMA will consider the potential need for recalibration of transparency thresholds for emission allowances and emission allowance derivatives.
7. Providing further guidance to ensure that only “EU” ISINs are used for the purpose of reporting spot emission allowances.
8. Providing further clarity on the distinction between spot emission allowances and derivatives on emission allowances.
9. Increasing the level of transparency in OTC derivatives.

10. Introducing a new identifier in the case of grouping of orders that would be generated and reported by only one entity per market execution and would be unique for the market-side reports and the client-side reports pertaining to the same execution.
11. Amending the EU Auction Regulation to ensure that ESMA also receives the information on primary markets transactions.
12. Increasing data harmonisation in line with the standards and structures used in regulatory reports under MiFID/EMIR and inviting the Commission to consider defining assets protection rules when accounts in the Registry are used as omnibus accounts. In addition, ESMA encourages the timely implementation of the requirement for the identification of account holders with LEIs.
    
    

(Added “surprising” to lead on March 30. Adds context)