ETS registries: Security first, liquidity second

Several serious incidents have marred the operation of the EU Emissions Trading Scheme (ETSⁱ) and led, in January, the European Commission to suspend trading. Trading under the EU ETS must be made more secure and CEMBUREAU is making recommendations in that respect.

Already in October 2010, some 470,000 allowances (EUAs) were stolen from 9 accounts in Germany. Hackers were at it again in January 2011, on a broader scale. This time 3.6 million EUAs were stolen from the registries in Austria, Czech Republic, Greece, Italy and Romania. In total EUAs worth 5 billion Euros were lost. Such criminal acts come on top of various VAT carousel frauds committed in relation to the ETS.

These repeated incidents have damaged the credibility of the EU trading system. As a result, the European Commission had to suspend trading between 19 January and 26 January and is now considering to impose minimum security measures to prevent the re-occurrence of such thefts.

On 15 March 2011, a stakeholder meeting was organised by the European Commission for the purpose of collecting views on what to do in addition to the safeguards already put in place by companies involved in trading. As cement companies have been victims of thefts, CEMBUREAU was represented at that meeting and held views largely shared by all industries that fall within the ETS scope (“compliance participants”).

The meeting was marked by a sharp division between the world of finance and industry.

On the one hand, traders who are involved in the business of buying allowances and reselling them at a profit want to maximise the fluidity of the market and to make sure that operations that have taken place are not at peril of claims by owners. Industry, on the other hand, wants to ensure maximum security. CEMBUREAU Members and related companies are obviously in the latter camp with the following recommendations.

• First of all, there should be at least 3 types of accounts:
  • “savings accounts” with limited transferability, with restrictions on time and volume limits (like a savings account), the proposed default option;
  • “current accounts” with operational ease for more frequent transfers for active trading, the proposed opt-out version;
  • “term deposits” for compliance participants only.

These accounts can only receive the annual allocation, surrender CO₂ allowances for compliance and transfer allowances exclusively to/from CO₂ accounts within the same group of entities such as a group of cement companies.

• There should be a regulatory limit on the EUAs volume that can be transferred with an opt out, however, when strict conditions are met, i.e.:
  • proof to registry that automated transfer systems are used supporting quick transfers;
  • having undergone enhanced KYC (Know Your Customer) checks and clearance by the registry operator;
  • proof of appropriate insurance; or
  • being MiFID (Markets in Financial Instruments Directive 2004/39/EC)¹ regulated.

Such opt out would provide market traders and financial institutions with a fast track whenever speed is required.

• Serial numbers offer an additional level of security. CEMBUREAU is opposed to their disclosure being stopped. Splitting up allowances in tranches and moving EUAs across multiple accounts are key methods to launder stolen certificates. Disclosure of serial numbers is obviously an effective way to stop the further spreading of EUAs.
• Finally, a quick “alarm” system is proposed whereby an operator detecting the fraudulent transfer of EUAs from its account will verbally inform the registry operator of the theft. The registry operator, who has access to the serial numbers, will in turn establish the serial numbers of the transfer and immediately inform the CITL (Community Independent Transaction Log) via established “alarm communication” channels. The CITL will then put those serial numbers on a black-list and screen all further transfers against that list. Once a transfer of these EUAs is proposed that transfer is blocked and the source and destination accounts of this transfer are also blocked by the CITL.

The results of the on-going debate are awaited, with understandable impatience, by stakeholders. The effective operation of the EU ETS may well depend on the outcome. The industries covered by the EU ETS insist that what must predominate is the very goal of the EU ETS, which is to enable them to reduce CO2 emissions in the most economical manner. A liquid CO₂ market only comes second, after the genuine concerns of industry over security have been properly addressed.