.jpg)
Bayerische Börse AG, operator of CO2 carbon certificates trading platform greenmarket, has won SIX x-clear AG as a key partner for its post-trade processes. The clearing house of the Swiss SIX Group, SIX x-clear AG will act as a central counterparty with responsibility for all clearing and settlement on the greenmarket exchange with effect from the fourth quarter of 2010. Under the new partnership, carbon certificate trading will be faster and more secure.
"By introducing the function of a central counterparty (CCP), we are further enhancing the quality of our services in spot trading in European Union Allowances (EUAs) and Certified Emission Reductions (CERs). We are also establishing an internationally recognised financial market architecture in preparation for the launch of futures trading in carbon credits at the end of the year“, explains Dr. Christine Bortenlänger, Member of the Management Board of Bayerische Börse AG.
"The function of a central counterparty eliminates default risks in the event of illiquidity of a market member, and prevents value added tax fraud. It is thus particularly essential for futures trading", continues Bortenlänger. "We will now work with our Swiss partner to offer emissions trading, clearing and settlement processes in genuine real time as the first stock exchange to do so. As considerable benefit, the partnership will enable us to reduce fees on greenmarket by 25 per cent, making the platform even more attractive for our market members", she concludes.
CCP
The Central Counterparty (CCP) acts as a partner for both trading parties in the clearing and settlement of a transaction. During the clearing process, the CCP divides the purchase or sale of carbon credits on greenmarket into two separate and independent transactions. If one of the two parties to a transaction defaults, the CCP intervenes to prevent the other party from incurring damage. In return, the CCP requires market members to furnish security deposits (margins) aligned to the current day's risk estimates for the transaction in question. The clearing process takes place after conclusion of the transaction (matching), but before its clearing and settlement.
The CCP setup: adding security
As the central partner for all greenmarket members, SIX x-clear will eliminate the risk of default by securing both the sale and purchase sides. In addition, the CCP system replaces direct contact between buyer and seller and thus guarantees post-trade anonymity. Trading strategies thus remain unidentified and unknown, as is customary in securities trading. The function of the CCP will also practically eliminate the potential for value added tax fraud. The "reverse charge rule" under which purchasers, not sellers, must pay value added tax has been in effect in Germany since 1 July 2010; in addition, zero value added tax now applies to carbon trading in Switzerland – the domicile of SIX x-clear. Carousel fraud has thus been beaten.
The new CCP setup: increasing liquidity
Under SIX x-clear's CCP function, trading, clearing and settlement services are fully automated, enabling trading strategies to be implemented in real time. Together with the narrow spreads between bid and asked prices on greenmarket, this real-time settlement represents a cash-effective financial benefit for market members, enabling them to manage cash and certificate portfolios directly and with rapid turnover.
The CCP setup: adding convenience
The new CCP setup enables market members to make use of general clearing member services (including credit lines and online account access), in addition to providing easy and convenient trading using Trayport's Global Vision, a trading software in widespread use throughout the commodity trading sector, and SIX x-clear's integrated clearing and settlement system. In addition, clearing members have the option of net or gross settlement, where the intermediary general clearing member (GCM) settles all sell and buy orders from the day and market members are charged only the difference (net settlement or netting).
