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| Allowance Trading General Terms
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Market conventions related to allowance trading:
- Firm Bid or Offer :The price at which a buyer or seller will purchase (bid) or sell (offer) allowances.
- Spot Market: The leading bid and leading offer for which parties will purchase or sell current vintage allowances. The spot market is the most active in SO2 trading, and is for immediate cash settlement.
- Bid/Ask Spread: The difference between the lead bid and the lead offer. The Bid/Ask Spread varies daily, and can be anywhere between $0.25 :$0.50 up to $3 :$5, depending on the degree of certainty buyers and sellers have in the market.
- Transaction Size: The size of transaction varies based on the buyer and seller. Spectron Energy’s team of brokers can arrange for transactions of any size.
- Market Depth: The Spot Market typically has between 10,000 and 20,000 firm bids shown at any given time.
Allowance Transaction Structures:
- Immediate Settlement Transaction: This type of transaction is the most liquid, with daily volumes often exceeding 25,000 allowances. Immediate Settlement Transactions can occur for allowances of any vintage; however, generally the most active allowances are those of the current vintage. After a successful trade, a cash settlement is to be paid to the seller within 3 days of confirmation from the EPA’s Allowance Tracking System verifying that the allowances were successfully delivered from the seller’s account to the purchaser’s account.
- Forward Transactions: A forward transaction consists of an agreement between buyer and seller to exchange allowances for money at a future date as specified. The allowance is sold at a price based on the forward market curve, which is a speculation of the price of the allowance based on the current price and escalated based on the money of market participants for the specific term of the trade. Markets are typically available for months much later of the given vintage year, generally near the end, but contracts are also available for delivery of allowances as far as 3 years in the future.
- Stream Transactions: Streams of allowances may be sold in consecutive years, (i.e., from 2003 through 2005) allowing the seller to deliver a set number of allowances each consecutive year. Both immediate settlement and forward settlement is typically available on this type of transaction.
- Option Transactions: Many different varieties of options are available, allowing the buyer a great deal of flexibility. Options range from straight put and call options that place a ceiling or floor for prices, to more complex options including collars, straddles, strangles, put and call spread options, time spreads and even combinations of various options into compound options. Most option transactions are “European,” only usable on the expiration date.
- Vintage Swaps or Loans: Allowances may be exchanged directly for other allowances in a swap or loan. Generally, a utility short on credits may trade allowances of a future vintage in exchange for current vintage allowances that may be used if the utility is short. Both sides of this transaction benefit, as the utility that is short on allowances has covered its emissions, and the seller has insured future stability by securing more allowances of a future vintage, as they generally trade at a lower rate. Generally in allowance swaps, a ratio based on price is used to determine the number of newer vintage allowances that will be exchanged.
- Cross-Commodity or Interpollutant Swap: In a non:monetary exchange, allowances may be exchanged for allowances of another emission or commodity at an appropriate price ratio, ensuring that both sides of the transaction are equal in value.
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