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28 March 2022 | ESMA70-445-38

Final Report

Emission allowances and associated derivatives

ESMA • 201-203 rue de Bercy • CS 80910 • 75589 Paris Cedex 12 • France • Tel. +33 (0) 1 58 36 43 21 • www.esma.europa.eu

28 March 2022

ESMA 70-445-38

Table of Contents

1 Executive Summary ................................................................................................... 6

2 Introduction .............................................................................................................. 10

3 Carbon markets surveillance ................................................................................... 18

3.1 Carbon markets under MAR .................................................................................... 18

3.1.1 Legal framework ............................................................................................... 18

3.2 Carbon market surveillance ..................................................................................... 22

3.3 Germany .................................................................................................................. 23

3.3.1 Systems and procedures at firm level ............................................................... 23

3.3.2 EEX’s own market surveillance ........................................................................ 24

3.3.3 Supervisory market surveillance ....................................................................... 25

3.3.4 Outcome of carbon market surveillance: STORs received and preliminary

investigations .................................................................................................................. 28

3.4 The Netherlands ...................................................................................................... 29

3.4.1 Systems and procedures at firm level ............................................................... 29

3.4.2 ICE Endex’s own market surveillance .............................................................. 30

3.4.3 Supervisory market surveillance ....................................................................... 30

3.4.4 Outcome of carbon market surveillance: STORs received and preliminary

investigations .................................................................................................................. 31

3.5 Norway ..................................................................................................................... 32

3.5.1 Systems and procedures at firm level ............................................................... 32

3.5.2 Nasdaq Oslo’s own market surveillance ........................................................... 32

3.5.3 Supervisory market surveillance ....................................................................... 34

3.5.4 Outcome of carbon market surveillance: STORs received and preliminary

investigations .................................................................................................................. 34

4 Carbon market analysis ........................................................................................... 34

4.1 Literature review ...................................................................................................... 35

4.2 Evolution of carbon prices and volatility ................................................................... 36

4.2.1 Spot prices ........................................................................................................ 36

4.2.2 Forward curve ................................................................................................... 39

4.2.3 Volatility ............................................................................................................ 41

4.2.4 Comparison with other assets .......................................................................... 44

4.2.5 Carbon market supply and demand dynamics ................................................. 45

4.2.6 Buy and hold strategies .................................................................................... 47

4.3 Evolution of trading and counterparties in EU carbon markets ................................ 50

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28March2022ESMA70-445-38FinalReportEmissionallowancesandassociatedderivativesESMA•201-203ruedeBercy•CS80910•75589ParisCedex12•France•Tel.+33(0)158364321•www.esma.europa.eu228March2022ESMA70-445-383TableofContents1ExecutiveSummary...................................................................................................62Introduction..............................................................................................................103Carbonmarketssurveillance...................................................................................183.1CarbonmarketsunderMAR....................................................................................183.1.1Legalframework...............................................................................................183.2Carbonmarketsurveillance.....................................................................................223.3Germany..................................................................................................................233.3.1Systemsandproceduresatfirmlevel...............................................................233.3.2EEX’sownmarketsurveillance........................................................................243.3.3Supervisorymarketsurveillance.......................................................................253.3.4Outcomeofcarbonmarketsurveillance:STORsreceivedandpreliminaryinvestigations..................................................................................................................283.4TheNetherlands......................................................................................................293.4.1Systemsandproceduresatfirmlevel...............................................................293.4.2ICEEndex’sownmarketsurveillance..............................................................303.4.3Supervisorymarketsurveillance.......................................................................303.4.4Outcomeofcarbonmarketsurveillance:STORsreceivedandpreliminaryinvestigations..................................................................................................................313.5Norway.....................................................................................................................323.5.1Systemsandproceduresatfirmlevel...............................................................323.5.2NasdaqOslo’sownmarketsurveillance...........................................................323.5.3Supervisorymarketsurveillance.......................................................................343.5.4Outcomeofcarbonmarketsurveillance:STORsreceivedandpreliminaryinvestigations..................................................................................................................344Carbonmarketanalysis...........................................................................................344.1Literaturereview......................................................................................................354.2Evolutionofcarbonpricesandvolatility...................................................................364.2.1Spotprices........................................................................................................364.2.2Forwardcurve...................................................................................................394.2.3Volatility............................................................................................................414.2.4Comparisonwithotherassets..........................................................................444.2.5Carbonmarketsupplyanddemanddynamics.................................................454.2.6Buyandholdstrategies....................................................................................474.3EvolutionoftradingandcounterpartiesinEUcarbonmarkets................................5044.3.1Overviewoftheavailabledatasets...................................................................504.3.2Classificationofcounterpartiesusedinthisreport...........................................524.3.3AnalysisbasedonAuctiondata........................................................................544.3.4AnalysisbasedonEMIRdata...........................................................................564.3.5AnalysisbasedonMiFIDtransactionreports...................................................744.3.6Analysisbasedonweeklypositionreports.......................................................854.3.7Analysisbasedondailypositionreports...........................................................944.3.9AnalysisbasedondatafromtheUnionRegistry............................................1054.4Conclusionofthecarbonmarketdataanalysis.....................................................1125Policyrecommendationsandissuesforconsideration..........................................1155.1Extendedscopeofpositionmanagementcontrols................................................1155.1.1Background.....................................................................................................1155.1.2Recommendations..........................................................................................1165.1.3Impactandregulatorygoal.............................................................................1165.2Clarificationofpositionreportinginemissionallowances......................................1175.2.1Background.....................................................................................................1175.2.2Recommendation............................................................................................1175.2.3Impactandregulatorygoal.............................................................................1185.3Improvedgranularityandconsistencyofweeklypositionreports..........................1185.3.1Background.....................................................................................................1185.3.2Recommendations..........................................................................................1195.3.3Impactandregulatorygoal.............................................................................1205.4Refinedtransparencycalibrations..........................................................................1215.4.1Background.....................................................................................................1215.4.2Recommendations..........................................................................................1215.4.3Impactandregulatorygoal.............................................................................1215.5IncreasedtransparencyandreportingofOTCtransactions..................................1225.5.1Background.....................................................................................................1225.5.2Recommendations..........................................................................................1255.5.3Impactandregulatorygoal.............................................................................1265.6TrackingchainoftransactionsinMiFIRregulatoryreports....................................1275.6.1Background.....................................................................................................1275.6.2Recommendation............................................................................................1275.6.3Impactandregulatorygoal.............................................................................1275.7ESMAaccesstoprimarymarketstransactions.....................................................12855.7.1Background.....................................................................................................1285.7.2Recommendation............................................................................................1285.7.3Impactandregulatorygoal.............................................................................1285.8ImprovedEUAregistry...........................................................................................1295.8.1Background.....................................................................................................1295.8.2Recommendation............................................................................................1305.8.3Impactandregulatorygoal.............................................................................1305.9Positionlimits.........................................................................................................1305.9.1Background.....................................................................................................1305.9.2Issueforconsideration....................................................................................1315.9.3Impactandregulatorygoal.............................................................................1315.10AcentralisedmarketmonitoringoftheEUcarbonmarket....................................1345.10.1Background.....................................................................................................1345.10.2Issueforconsideration....................................................................................1345.10.3Argumentsinfavour........................................................................................1355.10.4Argumentsagainst..........................................................................................1365.11Conclusions...........................................................................................................1386Annexes.................................................................................................................1406.1Annex1..................................................................................................................1406.2Annex2..................................................................................................................1416.2.1Policyrecommendations.................................................................................1416.2.2Issuesforconsideration..................................................................................14361ExecutiveSummaryReasonsforpublicationTheEuropeanEmissionTradingSystem(ETS)isakeytooloftheEUpolicyagainstclimatechange.ItputsapriceontheCO2thatentitiessubjecttocomplianceobligationscanreleasetotheatmosphere,withtheoverallobjectiveofreducingnetgreenhousegasemissions.InitsCommunicationonEnergyPrices“Tacklingrisingenergyprices:atoolboxforactionandsupport”,publishedon13October2021,theEuropeanCommissionhighlightsthatquestionshaveemergedaroundthefunctioningoftheEuropeancarbonmarket.Inordertoexaminemorecloselypatternsoftradingbehavioursandthepotentialneedfortargetedactions,theCommissionaskedESMAforafirstpreliminaryassessmentofEuropeancarbonmarketsby15Novemberandtaskedittoanalyse,byearly2022,thetradingofemissionallowances.FollowingthepublicationofitsPreliminaryReportonEmissionAllowancesandderivativesthereof1,ESMAispublishinginthisreportitsanalysisofthetradingofemissionallowances.ContentFollowingtheintroduction(Section2)whereESMAprovidesahigh-leveloverviewofthefunctioningofprimaryandsecondaryemissionallowancemarkets,includingtheprocessfromthecreationofemissionallowancesuntiltheyaresurrenderedeveryyearbyentitiessubjecttocomplianceobligationsundertheEUETS,thereportisstructuredasfollows:Section3describesthedifferentmechanismsforeseenintheMarketAbuseRegulation(MAR)whichaimatidentifyingandpreventingabusivemarketbehaviours.Adescriptionofthefollow-upcarriedoutbyNationalCompetentAuthorities(NCAs)uponidentificationofalertsforpotentialmarketabuseoruponreceptionofaSTORisalsoprovided.Section4presentsESMA’sanalysisofthedataregardingemissionallowancesgatheredfromdifferentsources,includingEMIRreporting,MiFIRtransactionreporting,MiFIDIIdailyandweeklypositionreports,auctiondataanddataobtainedfromtheEURegistry.Theanalysisfocusesinparticularontheevolutionofcarbonpricesanditsvolatility.ThedataanalysisperformedbyESMAevidencesthespecificitiesanduniquecharacteristicsoftheEUcarbonmarket,aswellasthechallengesofhavingacomprehensiveviewofthismarketandanin-depthunderstandingofitsdevelopments.Overall,ESMAconsidersthatthedataanalysishasnotunearthedanymajorabnormalityorfundamentalissueinthefunctioningoftheEUcarbonmarketfromafinancialsupervisoryperspective.Theobservedevolutionofcarbonpricesandvolatilityseemtohavefollowedmarketfundamentals.Inthiscontext,theemergenceofnewparticipants(andinstruments)withbuy-and-holdstrategieswarrantsfuturemonitoringtotheextentthattheymayleadtoareductioninthesupplyofphysicalemissionallowancesavailablefortrading,eventhoughtheavailableevidencesuggeststhattheirimpactisonlylimitedsofar.Whenlookingattradingonemissionallowancesandcounterpartiesinthismarket,thevarioussegmentsoftheEUcarbonmarketappeartobroadlyfunctionasexpected.Although7ESMAobservessomeconcentrationinprimarymarkets,thelargestparticipantsarealsoactiveinsecondarymarketsandensurethatauctionedemissionallowancesaredisseminatedtoothersecondarymarketparticipants.TradinginthesecondarymarketbetweenJune2021andDecember2021averagedEUR57billionpermonth.Mostofthetradinginthesecondarymarkettakesplacethroughderivativecontracts,asmanycomplianceentitiesseemtotakelongfuturespositionswithinvestmentfirmstoacquireemissionallowancesinsteadofpurchasingthemonthespotmarket.LargeholdingsofemissionallowancesintheTradingAccountsofinvestmentfirmsattheEURegistryappearhighlycorrelatedwithshortpositionsthesefirmstakeinemissionallowancederivativemarkets.Derivativemarketsaredominatedbycomplianceentitiesandothernon-financialsthatareholdinglongpositionsforhedgingpurposesandtradingwithinvestmentfirmsholdingshortpositionstomakeamarket.Mostofthetradingvolumesconcentrateinthenext(front-year)Decemberexpiryfuturescontract,althoughtherearealsosignificantpositionsintheMarchexpiryofthecurrentyearlinkedtothelifecycleofemissionallowanceswhichhavetobesurrenderedby30Aprileveryyear.Investmentfirms,creditinstitutionsandcomplianceentitiestendtotradefuturesacrossthematurityspectrum,whileinvestmentfundsandothernon-financialsectorfirmsappeartofavourtradinginfutureswitharesidualmaturityoflessthanoneyear.Investmentfundsandothernon-financialsectorfirmsalsotradeoptionstoalargerextent.Anincreaseintherelativeshareofoptionsintotalnotionalvolumestradedinlate2021isadevelopmentthatwarrantsmonitoring–asdotrendsinthelesstransparentOTCmarketsegment.ESMAhasalsoobservedactivityfromhigh-frequencytradingfirmsandmarketmakersengaginginalgorithmictrading,oftenfromtheUKandUS,thatarehoweveronlyholdingsmallnetpositions.ESMAhasfacedsignificantchallengeswhentryingtoidentifytheoriginsofmarketparticipantswhichmakesitcomplextoobtainaclearpictureofwhotradesandfromwhere.ESMAconsidersthatthesechallengesneedtobeaddressedinordertoimprovefuturemonitoringofEUcarbonmarkets.AsalreadyindicatedinthePreliminaryReportandhighlightedabove,therearealsochallengeswhenitcomestotheassessmentoftheavailabledata.Inthisrespect,futureresearchwillbeessentialtodeepenESMA’sunderstandingoftheemissionallowancemarketstructureandactivitiesofthird-countryfirms.ESMAisacutelyawarethatthewarintheUkrainehasamajorimpactapparentlyalsoonthecarbonmarket.WhileEUApricesweredecliningby30%injustafewdaysinlateFebruaryandearlyMarch,naturalgaspricesreachedall-timehighsinEurope.Thereareanumberofmacro-economicandalsotechnicalfactorswhichmayexplaintheselatestdevelopmentsspecificallyinthecarbonmarketwhichESMAisreferringtointhisreport.Thereareindicationsthatthedeclineinthecarbonpricemaybeassociatedwithconcernsaroundpossiblegassupplydisruptionsorimportbansleadingtoareducedneedfor8emissionallowances,combinedwithgeneralassumptionsconcerninganeconomicdownswingandEUcountriesexitingfossilfuelsatanearlierpointintimebutadditionalanalysismayberequiredinthefuture.Asfaraspricedevelopmentsareconcernedthisreportincorporatesdataupto4March2022.BasedonthedataanalysiscarriedoutinSection4andtheconclusionspresentedtherein,thefollowingsection(Section5)presentsaseriesofpolicyrecommendationstogetherwithsomeissuesforconsiderationthatESMAbelievesshouldcontributetoimprovingthetransparencyandthemonitoringoftheEUcarbonmarket.ESMAbelievesthatthemeasuresproposedwouldprovidemoreinformationtomarketparticipantsandthepublicatlargeaboutthecarbonmarketandtheywouldhelpinmaintainingorderlymarketsgoingforwardtherebycontributingtothecontinuedadequatefunctioningoftheEUcarbonmarketwhichplaysanimportantrolefortheUnion’sgreentransition.PolicyrecommendationsESMAputsforwardthefollowingpolicyrecommendations:1.Extendingpositionmanagementcontrolstotradingvenuestradingderivativesonemissionallowances.2.Adaptingpositionreportinginemissionallowances.3.AmendingtheaccountstructureattheUnionRegistrytoallowfortheidentificationofindividualEUAaccountholderssothattheUnionRegistrycanbeusedasadatasourceformarketmonitoringandtransparencyformarketparticipants.4.Publishingweeklypositionreportsonopenpositionsinfuturesonemissionallowancesonlyinadditiontothecurrentcombinedreportsonopenpositionsinfuturesonemissionallowancesandoptionsonfuturesonemissionallowances.5.Providingfurtherclaritytomarketparticipantsregardingcounterpartyclassificationsinweeklypositionreports.6.AspartoftheRTS2reviewunderway,ESMAwillconsiderthepotentialneedforrecalibrationoftransparencythresholdsforemissionallowancesandemissionallowancederivatives.7.Providingfurtherguidancetoensurethatonly“EU”ISINsareusedforthepurposeofreportingspotemissionallowances.8.Providingfurtherclarityonthedistinctionbetweenspotemissionallowancesandderivativesonemissionallowances.9.IncreasingtheleveloftransparencyinOTCderivatives.910.Introducinganewidentifierinthecaseofgroupingofordersthatwouldbegeneratedandreportedbyonlyoneentitypermarketexecutionandwouldbeuniqueforthemarket-sidereportsandtheclient-sidereportspertainingtothesameexecution.11.AmendingtheEUAuctionRegulationtoensurethatESMAalsoreceivestheinformationonprimarymarketstransactions.12.IncreasingdataharmonisationinlinewiththestandardsandstructuresusedinregulatoryreportsunderMiFID/EMIRandinvitingtheCommissiontoconsiderdefiningassetsprotectionruleswhenaccountsintheRegistryareusedasomnibusaccounts.Inaddition,ESMAencouragesthetimelyimplementationoftherequirementfortheidentificationofaccountholderswithLEIs.IssuesforconsiderationFurthermore,ESMAhasalsoconsideredtheargumentsinfavourandagainstthetwofollowingmeasures:1.TheapplicationofpositionlimitsontheopenpositionapersonmayholdinemissionallowancederivativesandeconomicallyequivalentOTCcontracts.2.Acentralisedmarketmonitoringofthecarbonmarket.Overall,ESMAhastakentheapproachinthisreporttoprovidefactualbackgroundinformation,basedondataandsecuritiessupervisorsexperience,toallowEUpolicymakerstomakeinformeddecisionsinrespectofthecarbonmarket.ESMAstandsreadytohelpimplementinganymeasureswhichtheCommission,CouncilandParliamentmaydecideoninthefuture.102Introduction1.On13October2021,theEuropeanCommissionadopteda“CommunicationonEnergyPrices”,tohelptackletheexceptionalriseinglobalenergypricesandhelpEurope'speopleandbusinesses.TheCommunicationincludeda“toolbox”fortheEUanditsMemberStatestoaddresstheimpactofpriceincreases.Thetoolboxalsoidentifiedactionsforstrengtheningresilienceagainstfutureshocks.2.OneofthemeasuresputforwardbytheEuropeanCommissioninthatCommunicationwastostepupmarketsurveillanceofenergymarkets,includingoftheEuropeancarbonmarket.Inthisrespect,theEuropeanCommissionaskedESMAtofurtherenhancethemonitoringofdevelopmentsintheEuropeancarbonmarketasfollows:“Toexaminemorecloselypatternsoftradingbehavioursandthepotentialneedfortargetedactions,theCommissionwillaskESMA,forafirstpreliminaryassessmentby15Novemberandtaskittoanalyse,byearly2022,thetradingofemissionallowances.TheCommissionwillconsequentlyassesswhethercertaintradingbehaviourswouldrequirefurtherregulatoryactions.”3.FollowingthemandatereceivedfromtheCommission,ESMApublisheditsPreliminaryReportonCarbonMarket2mid-November2021.ThePreliminaryReportprovidedafactualdescriptionofthemarketbasedonthedataimmediatelyavailabletoESMAbutdidnotdrawanyconclusionsonthefunctioningofEUAmarketsorprovidepotentialpolicyrecommendations.ESMAexplainedthatitwouldcompleteitspreliminaryanalysisbasedonamorecomprehensivedataanalysisandamorein-depthlookintorecentdevelopments.ThisReportistheresultofthatfurtherwork.FunctioningoftheEUAmarket4.ThissectionoftheReportfocusesontheauctionprocessandonthenegotiationofemissionallowances(EUAs)insecondarymarketsandprovidesahigh-leveloverviewoftheseprocesses3.Wheneveruseful,cross-referencesaremadetoothersectionsoftheReportincludingfurtherinformationaboutspecifictopics.5.AftertheircreationbytheEuropeanCommissionintheUnionRegistry4,EUAsmightbeallocatedforfreetosomeoperatorsintheEUorauctionedthroughaprocessregulatedbytheAuctionRegulation5(primarymarket)andpotentiallyexchangedinatradingvenueorOTCafterwards(secondarymarkets).Figure13inSection4.2.5ofthereportshowssupplyanddemandofEUAssince2017,includingEUAsbankedfromPhase2(2008-2012),freelyallocatedallowancesandthoseauctioned.2https://www.esma.europa.eu/sites/default/files/library/esma70-445-7_preliminary_report_on_emission_allowances.pdf3Processespresentedherehavebeensimplified,i.e.graphsdonotpresentdetailedchainsofintermediationandallpossibletradingscenarios,i.e.brokersandclearingmembersarenotspecified,forasimplifiedrepresentationofEUAsflowsinprimaryandsecondarymarkets.4TheUnionRegistryservestoguaranteeaccurateaccountingforallallowancesissuedundertheEUemissionstradingsystem(EUETS).TheregistrykeepstrackoftheownershipofallowancesheldinelectronicaccountsanditisusedforthedeliveryoftheEUAs.Pleaserefertosection4.3.8.1foramoredetaileddescriptionoftheUnionRegistry.5CommissionRegulation(EU)No1031/2010of12November2010onthetiming,administrationandotheraspectsofauctioningofgreenhousegasemissionallowances.116.Accordingtothisdata,since2018,freelyallocatedEUAsaccountformorethan52%oftheannualsupply,whileauctionedEUAsrepresenttheremainingmorethan47%.Primarymarkets7.TheprimarymarketforEUAsconsistsofauctionstowhich,inadditiontocomplianceentities6,mostcategoriesofmarketparticipantsareabletoparticipatein(e.g.creditinstitutions,investmentfirms,commoditytradingfirmswithoutcompliancerequirements).EUAsareissuedby25MemberStates(andtheEEAEFTAStatessince20197)throughanauctioningprocesswhichishostedbytheGermantradingvenueEEX.TheothertwoMemberStates(GermanyandPoland)issueemissionallowancesthroughasimilarauctioningprocessalsoonEEX.8.Entitieswillingtoparticipateinauctionshavetocomplywithsomeregulatoryeligibilitycriteria8whichguaranteetheintegrityoftheauctionprocessandafairandopenaccessforallauctionparticipants.AccordingtotheAuctioningRegulation,thefollowingpersonsareeligibletoapplyforadmissiontobiddirectlyintheauctions:operatorswithcomplianceobligations(includingothersubsidiariesofthesamegroupofundertakingsastheoperatorwithcomplianceobligations),investmentfirmsauthorisedunderDirective2014/65/EU,creditinstitutionsauthorisedunderDirective2013/36/EU,businessgroupingsofcomplianceoperatorsbiddingontheirownaccountandactingasagentonbehalfoftheirmembers,publicbodiesthatcontrolanycomplianceoperator,andpersonscoveredbythe“ancillaryactivityexemption”ofMiFIDII9whentheMemberStatewheretheyareestablishedhasenactedlegislationenablingthe“relevantcompetentnationalauthority”inthatMemberStatetoauthorisethemtobidontheirownaccountoronbehalfofclientsoftheirmainbusiness.10.9.Furthermore,theAuctioningRegulationforeseesaseriesofrequirementsforeligiblepersonstobeadmittedtobidinauctions.Amongothers,theseadmissionrequirementsnotablyrequirealltheentitiesthatarenotcompliancebuyerstobeestablishedintheEU.Inaddition,allentitiesparticipatingintheauctionsmustopenanaccountintheUnionregistry,appointatleastonebidder’srepresentativeandcomplywiththeadmissionrequirementsoftheauctionplatform.Investmentfirms,creditinstitutionsandpersonscoveredbythe“ancillaryactivityexemption”,whensubmittingbidsonbehalfoftheirclients,mustcomplywithadditionalconditions.Theseadditionalconditionsaimatensuringthattheirclientsareeligiblepersonsandthatthenecessarycontractualagreementsareinplace(especiallywithregardstotheprocessofbidsfromtheirclients,thepreventionofdisclosureofconfidentialinformationandtoensurethattheirclients6CompaniesandaircraftoperatorswhoareobligedtoparticipateintheEUETS.7https://ec.europa.eu/clima/news-your-voice/news/emissions-trading-revised-2019-auction-calendars-including-eea-efta-volumes-published-2019-05-16_en8Articles18and19ofRegulation1031/2010onthetiming,administrationandotheraspectsofauctioningofgreenhousegasemissionallowances(theAuctioningRegulation)9Article2(1)(j)ofDirective2014/65/EU10Article18(2)oftheAuctioningRegulationstatesthefollowing:WithoutprejudicetotheexemptioninArticle2(1)(i)ofDirective2004/39/EC,personscoveredbythisexemptionandauthorisedpursuanttoArticle59ofthisRegulationshallbeeligibletoapplyforadmissiontobiddirectlyintheauctionseitherontheirownaccountoronbehalfofclientsoftheirmainbusinessprovidedthataMemberStatewheretheyareestablishedhasenactedlegislationenablingtherelevantcompetentnationalauthorityinthatMemberStatetoauthorisethemtobidontheirownaccountoronbehalfofclientsoftheirmainbusiness.12whenactingthemselvesonbehalfofotherclientsapplytherequirementsrelevanttoeligiblepersons).EEXfurtherrequirespotentialbidderstoprovideevidenceofpersonalreliabilityandprofessionalqualification,toberecognisedasatradingparticipantbytheCCPECCandtoconcludeanagreementwithaclearingmemberofthisCCP.10.OnceanentityhasbeenadmittedbyEEX(andECC),itcanparticipateintheauctionsandsubmitbids.AsfurtherdescribedinSection4.3.3,thenumberofuniqueparticipantsinEUAauctionsheldbetweenJanuary2021andDecember2021was48(ofwhich34werenon-financialsand14financials).11.EEXauctionstwotypesofallowances:EUgeneralallowances(EUA)andEUaviationallowances(EUAA)11.Theauctionstakeplaceonadailybasisaccordingtoafixedcalendar12.Oneallowancepermitstheemissionofonetonneofcarbondioxideequivalent(CO2).Asfurtherdescribedinsection4.3.3,thetotalquantityofEUAsauctionedfromJune2020untilDecember2021(periodforwhichESMAhasreceiveddataundertheAuctioningRegulation)wasjustunderonebillionforatotalmarketvalueofEUR41.8billion(aroundEUR120millionperday),includingEUR31bnin2021only.Incomparison,thetotalquantityofEUAsauctionedduringthesameperiodamountedtojust7million,or0.7%ofthetotal.12.Thesuccessofabidwilldependonthepriceandtheamountofallowancesauctioned13.Article7oftheAuctioningRegulationdetailshowtheauctionclearingpriceistobedeterminedbyfollowingtheprocessbelow:•Bidsaresortedindescendingorderofthepricebid;•Bidvolumesareadded,startingwiththehighestbid;thepriceatwhichthesumofvolumesbidmatchesorexceedsthevolumeofallowancesauctionedshallbetheauctionclearingprice;•Tiedbidswillbesortedthroughrandomselectionaccordingtoanalgorithmdeterminedbytheauctionplatformbeforetheauction;•Allbidswithapricehigherthantheauctionclearingpricearesuccessful.Executionofbidsmadeattheauctionclearingpricedependsontheirrankingintherandomselection(i.e.allbidsatthesamepricearenotexecutedfollowinganorderbasedontheirtimestamp,butaccordingtotheordergivenbytheplatform’salgorithm).Allsuccessfulbidspaythesameauctionclearingpriceeveniftheybidhigher.•Partialexecutionofordersmaybepossibleforthelastsuccessfulbidmatchingtheauctionclearingprice,dependingontheremainingquantityofallowances.11Specificallyforeseenfortheaviationsector.Nevertheless,asof2021,bothtypesofallowancesarefungibleandaviationallowancescanbeusedtofulfilcomplianceobligationsbystationaryinstallationsandviceversa.12Monday,TuesdayandThursdayforauctionsonbehalfoftheMemberStatesandtheEEAEFTAStatesparticipatinginthecommonauctionplatform,WednesdayonbehalfofPolandandFridayonbehalfofGermany.13TheamountofauctionedEUAsisfixedinadvanceandcanbeadjustedonlyafewtimesduringtheyear.1313.EntitieswhosubmitsuccessfulbidsduringtheauctionprocesscangetallowancesdeliveredintheiraccountsattheEURegistry14.Fromanoperationalperspective,twoparallelprocessesaretobedistinguished.Firstly,attheleveloftheEURegistry,EUAswillbetransferredfromtheEUAuctionAccountintheEURegistry(whichtogetherwiththeFreeAllocationAccountaretheRegistryaccountsmanagedbytheEuropeanCommission,cf.Section4.3.8.2)tothesuccessfulbidder’saccountintheRegistry,goingthroughtheCCPaccounts.Secondly,attheleveloftheCCPECC,internalaccountsoftheauctioneersandofthebuyersarecreditedanddebited.14.AttheleveloftheEURegistry,asillustratedinthegraphbelow,auctionedEUAsaretransferredfromtheEUAuctionAccounttotheCCPAuctionCollateralDeliveryAccount.Oncethepaymenthasbeenmadetotheauctioneers,ECCisallowedtotransfertheEUAsfromitsAuctionCollateralDeliveryAccounttoitstradingaccountattheUnionRegistry.ECCdeliverstheemissionallowancestothebuyer’sregistryaccountsontheirrequest.EUAflowattheEURegistry.15.AttheleveloftheCCP,asillustratedinthegraphbelow,deliveriesofEUemissionallowancesareeffectedbybookingwithinECC’sinternalaccounts.ECCtransferstheholdingsfromtheinternalaccountsoftheauctioneerstotheinternalaccountsofthebuyersonthedeliveryday,afterpaymentonT+1.Thisinvolvesthetransferoftheallowancesinexchangeofthereceivedcash,wherethecashpaymentsareprocessedviatheclearingmembers.Oncetheallowancesarewithinthebuyer’saccountattheCCP,thebuyercankeepthemintheaccount,sellthemorrequestdeliverytoanotherregistryaccount.Indeed,theaccountsattheEURegistrycanactasomnibusaccountsandassuchECC’saccountcanholdtheallowanceofasuccessfulbidderwithouttransferringthemtothesuccessfulbidder’sownregistryaccount.ThisimpliesthattheremightbemismatchesbetweentheinformationdisplayedthroughtheholdingsofEURegistryaccountsandtheaccountsattheCCPlevel(cf.Section5.2onrecommendationsonclarificationofpositionreportingofEUAsandSection5.8onthefunctioningoftheEURegistry).EUAflowattheCCP.14ECCdeliverstheallowancesintheUnionRegistryaccountofthesuccessfulbidderattherequestofthebidder.Ifthesuccessfulbidderwishes,theallowancescanbedeliveredtoanotheraccountforinstancewhentheallowancesareusedtofulfiladeliveryobligationforderivativescontracts.EUAuctionAccountECCAuctionCollateralDeliveryAccountECCTradingAccountSuccessfulbidder'sRegistryAccountAuctioneerinternalaccountBuyerinternalaccount14Secondarymarkets1516.ThreeEuropeantradingvenuesoffertradingindifferentcontractsonEUAs:EEXinGermany,ICEEndexintheNetherlandsandNasdaqOsloinNorway.Thecontractsofferedfortradingarethefollowing(1)contractswithadailyexpiry,called“dailyfutures”or“spot”16,(2)futureswithvariousmaturities;and(3)optionsonfutures.Allderivativeshaveastandardisedcontractsizeof1,000allowances(i.e.1,000tonnesofCO2).DerivativesonemissionallowancestradedinthesetradingvenuesareclearedrespectivelybyECCAGinGermany,ICEClearEuropeLtd.intheUK17,andNasdaqClearinginSweden.ItistobenotedthatafterthetransferofthetradingofderivativesonEUAsinICEfromitsUKtradingvenuetoICEEndexintheNetherlands,ICEcontractsremainclearedbyICEClearEuropeintheUK.TheseCCPsalsoofferclearingforOTCtransactions.Amorein-depthanalysisofthepost-tradeactivityinEUAsispresentedinsection4.3.4.6.17.AcomparisonofopenpositionsonthethreetradingvenuesEEX,NasdaqOsloandICEEndexshowsasignificantdominanceofICEEndex(around85%ofthetotalgrosspositions,seethefullanalysisinSection4.3.7andinparticularFigure66)whileEEXholdstheremaining15%andthemarketshareofNasdaqOsloremainsmarginal.OpeninterestisconcentratedinthefuturecontractsexpiringinDecemberofthecurrentyear.18.Generallyspeaking(althoughtheremightalsobenegotiatedtransactionsbeingsubmittedtoatradingvenue),amarketparticipantcanplaceabuyorsellorderforaderivativeonEUAsintheorderbookofatradingvenue.Iftheordermatchesanoppositeorderandboththebuyerandthesellerkeeptheirpositionsopenuntilmaturity,theywillfollowtheprocessestablishedbytherelevantCCPtoensurethatEUAsaredeliveredfromtheaccountofthesellertotheaccountofthebuyerintheUnionRegistryandthatthesellergetsthecorrespondingamountofcashfromthebuyer.Thesettlementofthetwoseparatelegsofthetransaction(EUAandcash)takesplaceindifferentplaces:EUAflow15Article3(11)ofRegulation1031/2010defines“Secondarymarkets”asfollows:“(…)themarketinwhichpersonsbuyorsellallowanceseitherbeforeoraftertheyareallocatedeitherfreeofchargeorthroughauctioning”.16EEXreferencesto“spot”andICEreferencesto“dailyfutures”bothcovercontractswithadailyexpiry.17ESMA’sAssessmentReportunderArticle25(2c),p.74:“OtherproductsclearedwithintheF&Osegmentarenotconsideredtobeofsubstantialsystemicimportance.Marketsharesvarydependingontheproduct(Energy,Equities,SoftCommodities),andthoughtheexactexposuresofEUclearingmembersarenotavailable,EUactivityappearstobespreadovermanydifferenttypesofproducts.”UnionRegistryAccountoftheSellerUnionRegistryAccountoftheCCPUnionRegistryAccountoftheBuyer15Cashflow19.Oncethebuyer(e.g.anoperatorwithcomplianceobligations)hasreceivedtheEUAsinitsaccountattheRegistry,itcansurrendertheallowancestocomplywithitsobligationsundertheETSDirective.Theoperators’deadlineforsurrenderingEUAsis30AprilofeachyearfortheyearY-1.ThesellerinthesecondarymarketcouldalsobeanentitywithcomplianceobligationswhohasallowancesinexcessofitsfinalverifiedemissionsofCO2,independentlyofwhethertheexcessallowanceshavebeenacquiredthroughprimaryorsecondarymarketsorevenallocatedforfree.20.Inadditiontothenegotiationontradingvenues,EUAsandderivativesthereofcanalsobeexchangedbilaterallybetweentwoentitiesoutsidearegulatedtradingplatform,i.e.over-the-counter(OTC).OTCtransactionsmayinvolvetradingparticipantswithorwithoutcomplianceobligations.WhilecounterpartiestoanOTCtransactionhavecontractualfreedomtodecideonthetermsandconditionsofthetransaction,thedeliveryoftheallowancewillalwaystakeplacethroughtheUnionRegistry,wherethesellerwillhavetoproceedwithatransferfromitsaccounttotheaccountofthebuyer.ThefinancialflowforpurelyOTCtransactionsareseparatedfromthetransferintheregistry.21.Takingintoconsiderationtheabovedescriptionsoftheprimaryandsecondarymarkets,andassumingthatthesuccessfulbidderintheauctionwouldnotholdtheemissionallowancestocomplywithETSobligationsortoholdthemasitcanbeseeninsomespecifictradingstrategies(cf.buy-and-holdstrategiesdescribedinSection4.2.6)butrathertoprovideliquidityinsecondarymarkets,anemissionallowancecanfollowthecompletelifecyclerepresentedbythegraphsbelow,fromtheEUAuctionAccountintheEUregistryuntilthesurrenderoftheEUAbythecomplianceentity.Consideringthefindingsinsection4.3.8.2ofthisreport,suchanapproachwouldmakesenseinparticularinthecaseoffinancialentitiesprovidingliquidityinEUAs,asdatashowsthatmostfinancialsarebuyingphysicalEUAswiththeplantosellthemagaininthefuture.BuyerCCPSeller16ETSmarketsoutsidetheEU22.In2020,theEUETSaccountedforalmost90%oftheglobalcarbonmarketvalue18.23.BesidestheEUETS,nationalorsub-nationalsystemsarebeingoperatedorareunderdevelopmentinCanada,China,Japan,NewZealand,SouthKorea,Switzerland19,the18RefinitivCarbonMarketReview2020.19FollowingthesignatureoftheAgreementbetweentheEuropeanUnionandtheSwissConfederationonthelinkingoftheirgreenhousegasemissiontradingsystemsinDecember2017,theSwissETSlinkedwiththeEUETSofficiallyinJanuary202017UnitedKingdom20,theUnitedStatesandothercountriesworldwide.ThelevelofdevelopmentofETSmarketsinthosecountriesvariessignificantlydependingonanumberofdifferentfactors(e.g.politicalambitionsrelatedtothereductionofgreenhousegasemissions,organisationofthesystem,experience,pollutingentitiescovered,etc.).Section4.2.1.ofthisreportprovidesmoreinformationonpricesdevelopmentsinthoseotherETSmarkets.24.ESMAhasnotundertakenanexhaustiveanalysisofthefunctioningofthesedifferentETSmarketsbuthasnotedseveralrecentinterestingdevelopments.Firstofall,afterseveralyearsofpreparation,China’sETSmarketofficiallystartedoperatingon16July202121.Thismarketcovers2,225energycompaniesthroughoutChina.Atthisinitialstageoffunctioning,onlythecoveredenergycompaniesareadmittedtotradeinthenationalETSmarketandonlyspotallowancesaretraded.However,theChinesenationalETSmarketisexpectedtocontinueevolving,inparticularbycoveringothertypesofpollutingactivities,allowingfinancialentitiestoparticipateinthemarketandintroducingnewproductssuchasfuturesandoptions22.Secondly,theSouthKoreanETSmarket23,whichhasbeenoperatingsince2015,enteredintoitsthirdphasein2021.Inthisnewphase,financialintermediariesareallowedtotradeSouthKoreanallowances(althoughwithsomelimitations24)withtheobjectiveofcomplementingthe“marketmakersystem”thatwasintroducedinPhase2tosupportmarketliquidity.Indeed,in2019,twoSouthKoreanbankswereofficiallyappointedasmarketmakers,whileathirdonejoinedaswelltoprovideliquiditytothemarketandtotryreducingthebid-askspread.Inbothcases,ESMAnotestheacknowledgmentofthecontributionoffinancialentitiestotheliquidityofthemarketsandtopricediscovery.Finally,intheU.S.,duringtheSeptember2021meetingoftheCFTC’sEnergyandEnvironmentalMarketsAdvisoryCommittee(EEMAC)25,theCFTChasbeenrecommendedtoformanEEMACsubcommitteetoprovideareporttotheEEMAConguidingprinciplesforthedesignofthederivativesandunderlyingcashmarketsforenvironmentalproducts,suchascarbonallowancesandoffsets,whichshowsanincreasinginterestinthistypeofmarketsatthefederalUSlevel.25.Followingtheoverviewofcarbonmarketsprovidedinthisintroduction,thereportfocuseson:thesurveillanceofcarbonmarkets,withaparticularfocusonthedifferentjurisdictionswhereEUAsaremostlytraded(Section3);theanalysisofthecarbonmarketsusingavarietyofdatasourcestoillustratetheevolutionofpricesandvolatilityofEUAsandtheevolutionoftradingandcounterparties(Section4);andaseriesofpolicyrecommendationsthatESMAconsidercouldbeimplementedinordertoimprovethefunctioningofEUAsmarkets.20On1January2021,theUKETSreplacedtheUK’sparticipationintheEUETS.21https://icapcarbonaction.com/en/?option=com_etsmap&task=export&format=pdf&layout=list&systems[]=5522https://www.reuters.com/article/china-carbon-trading-idAFL1N2TE03W23https://icapcarbonaction.com/en/?option=com_etsmap&task=export&format=pdf&layout=list&systems[]=4724P.18https://icapcarbonaction.com/en/?option=com_attach&task=download&id=72325https://www.cftc.gov/PressRoom/Events/opaeventeemac091521183Carbonmarketssurveillance3.1CarbonmarketsunderMAR3.1.1Legalframework26.TheEUmarketabuseregimeunderMARisaimedatpromotingtheintegrityofthemarketsthroughtheprohibitionofinsiderdealing,unlawfuldisclosureofinsideinformationandmarketmanipulation,altogetherreferredtoasmarketabuse.Tofostercomplianceandfacilitateenforcementofthoseprohibitions,MARprovidesforanumberofancillaryrulestobefollowedbyissuers,intermediariesandtradingvenuesintheattempttoreducetherisksofmarketabusebeingcommitted,andforsignificantpowersforNCAsinthedetectionandprosecutionofbreaches.27.WhilsttheNCAs’powerstoenforceandprosecutebreachesofMARarenecessarilyexercisedpostfacto,theEUmarketabuseregimeprovidesforanarticulatedsystemofmarketsurveillancethatisbuiltuponseverallinesofdefencetodetectandpreventmarketabuse.28.Inthatsense,theEUmarketsurveillancesystemsthatwearedescribinginthissectionaredesignedaroundthestatutoryprohibitionsofmarketmanipulationandinsidertradingunderMARandarenotcreatedtodetectnorpreventanyformofspeculation-drivenimpactonpricesthatdoesnotrepresentaviolationofthemarketabuseprohibitions.29.Withparticularreferencetomarketmanipulation,Article12ofMARexpresslyprohibits:a)placingorders,enteringintotransactionsoranyotherbehaviourthatgivefalseormisleadingsignalsastothesupply,demandorpriceofafinancialinstrument,orthatarelikelytosecureitspriceatanabnormalorartificiallevel.b)placingorders,enteringintotransactionsoranyotherbehaviourwhichaffectsorislikelytoaffectthepriceofafinancialinstruments,whichemploysafictitiousdeviceoranyotherformofdeceptionorcontrivance;c)disseminatinginformationthroughthemediawhichgives,orislikelytogive,falseormisleadingsignalsastothesupplyof,demandfor,orpriceof,afinancialinstrument,orislikelytosecureitspriceatanabnormalorartificiallevel,includingthedisseminationofrumours,wherethepersonwhomadethedisseminationknew,oroughttohaveknown,thattheinformationwasfalseormisleading.30.Individualorconcertedactionsaimedatsecuringadominantpositionoverthesupplyofordemandforafinancialinstrumentisalsomarketmanipulation.31.Additionally,buyingorsellingemissionallowancesorrelatedderivativesonthesecondarymarketpriortotheauctionheldpursuanttoRegulation1031/2010isalsoconsideredmarketmanipulationwheneverithastheeffectoffixingtheauctionclearingpricefortheauctionedproductsatanabnormalorartificiallevelorwhereitmisleadsbiddersintheauctions.Theauctionpricesandsecondarymarketpricesareinterrelated,19astheauctionshouldbecancelledaccordingtoArticle7(6)ofRegulation1031/2010iftheauctionclearingpriceissignificantlybelowthepriceonthesecondarymarket.Thisaimsatpreventingmarketparticipantstobenefitfromarbitragebetweentheprimaryandsecondarymarkets.32.AnnexIofMARprovidesforanon-exhaustivelistofindicatorsrelatingtofalseormisleadingsignalsandtosecuringpricesatanartificiallevel.33.TheprohibitionofmarketmanipulationapplieshorizontallytoallfinancialinstrumentsadmittedtotradingonanEUregulatedmarketortradedonanMTForOTF.34.UnlikespotcommoditycontractsthatarenotfinancialinstrumentsandthereforearenotsubjecttothefullsetofruleslaiddowninMAR26(withtheconsequencethatonlyderivativesthereofarefullycoveredbytheMARprovisions),emissionallowancesarefinancialinstrumentsandsubject,togetherwithanyderivativethereof,tothefullsetofMARprovisions.35.Anyothertradingstrategythatdoesnotfallinanyoftheabovecategories,evenwhereitisexclusivelycarriedoutinthepursuitofabetovertheuncertainfuturepriceevolutionofafinancialinstrument,cannotbeconsideredmanipulative.36.Beyondmarketmanipulation,MARprohibitsinsiderdealingandunlawfuldisclosureofinsideinformation.37.Withreferencetoemissionallowancesandauctionproductsbasedthereon,Article7(1)(c)ofMARprovidesforaspecificdefinitionofinsideinformation,definedasinformationwhichisnon-public,preciseandthat,ifmadepublic,wouldbelikelytohaveasignificanteffectonthepricesofthoseinstrumentsorrelatedderivatives.38.Amongtheancillaryrulestoreducetherisksofmarketabusebeingcommitted,MARprovidesforgeneraltransparencyrequirementsthatalsoapplytoemissionallowancemarketparticipants,whoshouldtimelyandpubliclydisclosetheinsideinformationwhichtheyholdinrespectoftheiractivities.InthecaseofparticipantsintheemissionallowancemarketwithaggregateemissionsorratedthermalinputatorbelowthethresholdsetbytheCommissioninaccordancewithArticle17(2)ofMAR,insideinformationabouttheirphysicaloperationsisnottobedisclosed.39.Allotherparticipantsthatexceedthethresholdmustdiscloseinformationthatcouldinfluencetheprice,forexampleaplannedclosureofpowergenerationcapacities.40.Emissionallowancemarketparticipantsmaydelaythepublicdisclosureofinsideinformationwhereimmediatedisclosureislikelytoprejudicetheirlegitimateinterest,thatthedelayisnotlikelytomisleadthepublic,andconfidentialityisensured.Whenadelayinthedisclosuretookplace,emissionallowancemarketparticipantsshouldinformtheNCAandprovideawrittenexplanationofhowtherelevantconditionsweremet,immediatelyaftertheinformationisdisclosedtothepublic.Alternatively,MemberStates26Article2(2)ofMARstipulatesthattheprohibitionofmarketmanipulationappliestospotcommoditycontracts,whicharenotwholesaleenergyproducts,wherethetransaction,orderorbehaviourhasorislikelyorintendedtohaveaneffectonthepriceorvalueofafinancialinstrumentinscopeofMAR.20mayprovidethatarecordofsuchanexplanationistobeprovidedtotheNCAonlyuponrequest.41.Likeallissuers,inordertomonitortheflowofinsideinformation,emissionallowancemarketparticipantsaretodrawupalistofallpersonswhohaveaccesstoinsideinformation.Thatobligationappliestoemissionallowancemarketparticipantsinrelationtoinsideinformationrelatingtothephysicaloperationsofthatemissionallowancemarketparticipant,butalsotoanyauctionplatformandauctioneerinrelationtoauctionsofemissionallowancesorotherauctionedproductsbasedthereonpursuanttoRegulation1031/2010.42.Moreover,personsdischargingmanagerialresponsibilities,aswellaspersonscloselyassociatedwiththem,shouldnotifytheemissionallowancemarketparticipantandtheNCAofeverytransactionconductedontheirownaccountrelatingtoemissionallowances,toauctionproductsbasedthereonortoderivativesrelatingthereto.Emissionallowancemarketparticipantsaretodrawupalistofallpersonsdischargingmanagerialresponsibilitiesandpersonscloselyassociatedwiththem.43.Inadditiontotherulestoreducetherisksofmarketabusebeingcommitted,MARlaiddownrulestopromotepreventionanddetectionofmarketabuse.Article16ofMARlaiddownthatmarketoperators,investmentfirmsoperatingatradingvenueandanypersonprofessionallyarrangingandexecutingtransactionsestablisharrangements,systemsandprocedurestodetectandreporttoNCAssuspiciousordersandtransactions(STORs).44.Asaresult,thefirstlineofdefenceinthefightagainstmarketabuseisatfirmlevel,wherearrangements,systemsandprocedurehavetobeimplementedtoensurethatpotentiallyabusivetradingisdetectedandreportedintheformofanSTOR.Theirpresencerepresentsbothanex-antedeterrenceandawaytopromotedetectionpostfacto.45.Thosearrangements,systemsandproceduresalsocoveremissionallowancesandrelatedinstrumentsandshouldbeappropriateandproportionateinrelationtothescale,sizeandnatureoftheirbusinessactivity,toensurethatordersortransactionsthatraiseareasonablesuspicionofinsiderdealingormarketmanipulationareidentifiedandreportedtoNCAs.Reportingentitiesnotonlyhavetoreporttransactionscarriedoutonvenue,butalsoOTCtransactionswheneverconcerninginstrumentsinscopeofMAR.46.Inpracticalterms,theimplementedsystemsandproceduresshouldallowfortheanalysis,onanindividualandcomparativebasis,ofalltransactionsandordersdealtwith,andproducealertsindicatingactivitiesrequiringfurtheranalysis.47.Thesecondlineofdefence,complementingtheoneatfirmlevel,lieswithmarketoperatorsandinvestmentfirmsoperatingatradingvenue.48.Thesecondlineofdefencepresentsanenhancedscope,asmarketoperatorsandinvestmentfirmsoperatingatradingvenue,inadditiontotheirobligationtoidentifysuspiciousordersandtransactionsandreportthemviaSTORs,arealsosubjecttotheobligationtoestablishandmaintaineffectivesystemsandprocedurestopreventmarketabuse.Thistranslatesinastructuredmarketsurveillancecarriedoutatthelevelofthe21tradingvenue,whoseobjectiveistoensurethatnotonlysuspiciousordersandtransactionsaredetectedandreportedonanex-postbasis,butthatalsoordersareidentifiedandstoppedbeforemarketabusetakesplace.49.Likethemechanismsforthedetectionandreportingatfirmlevel,preventativemeasuresattradingvenuelevelshouldbeproportionatetothescale,sizeandnatureofthebusinessactivity,andincludeadequatesoftwarecapableofsystematicscreeningofallordersandtransaction,combinedwithanappropriatelevelofhumananalysiswhereappropriate.50.Finally,thethirdlineofdefenceisregulatorymarketsurveillance.NCAswithjurisdictionsovercarbonmarketshaveinplacetheirmarketsurveillancesystemstopromotetheintegrityofthemarketsandcombattingmarketabuse.51.Inthatfight,NCAsadoptamulti-stepsurveillanceapproach,whichintegratesalltheinformationavailabletothemundertheEUregimeandallthepubliclyavailableinformation.Thosedataareintegratedinrelationtobothemissionallowancesandthedifferentcategoriesofderivativesthereof,withautomatedalertsystemsthatcanbeindividuallyfollowedupandinvestigateduponidentification.52.Wheneveratransactionoranorderisflaggedaspotentiallysuspicious,apreliminaryanalysisiscarriedoutandapreliminaryinvestigationtakesplace.53.Inallthosecaseswherethepreliminaryinvestigationsconfirmthesuspicionofmarketabusebeingcommitted,NCAsmaylaunchaformalinvestigation,usingallthetoolsattheirdisposalunderMAR.54.ThetoolsattheNCAs’disposalwheninvestigatingapotentialmarketabusecaserangefromcorrespondingwithanysubjectinpossessionofinformationthatisusefulfortheinvestigation,toaccessingdataanddocumentinanyform,carryingouton-siteinspectionsandrequiringrecordingsofexistingtelephoneandelectroniccommunicationheldbyinvestmentfirms,creditandfinancialinstitutions.Insofarasitispermittedbynationallaw,NCAsmayalsorequireexistingdatatrafficrecordsfromtelecommunicationoperators.55.NCAsmayalso:▪requestthefreezingandsequestrationofassets;▪suspendtradingofthefinancialinstrumentsconcerned;▪requirethetemporarycessationofanypracticeconsideredcontrarytoMAR;▪imposeatemporaryprohibitionontheexerciseofaprofessionalactivity;▪takeallthenecessarymeasurestoensurethatthepubliciscorrectlyinformed,bycorrectingfalseormisleadingdisclosedinformationoraskingthepersonwhohaddisseminatedittodoso.56.IntheperformanceoftheirdutiesunderMAR,NCAscooperatewitheachotherandwithESMA,exchanginginformationandrenderingassistanceasopportune.223.2Carbonmarketsurveillance57.Inthepursuitoftheoverallgoaltoensuremarketintegrityandpreventanddetectmarketabuse,asdescribedintheprevioussection,severallinesofdefencehavebeendesignedbytheEUregime.ThisapproachfullyappliestotheEUcarbonmarkets.58.ThearchitectureoftheEUcarbonmarketsurveillanceintegratesthereportingobligationsofpersonsprofessionallyarrangingandexecutingtransactionswiththedetectionandpreventionobligationsoftradingvenuesand,atthelastlevel,themarketsurveillancesystemsofNCAs.59.NCAs’supervisionoffirmsandtradingvenuesisinstrumentaltotheeffectivenessofthefirstandsecondlineofdefence,asitensuresthattheirsystemsandproceduresareadequatetodetectandpreventmarketabuse.60.However,investmentfirmsarealsosubjecttoorganisationalrequirementsunderMiFIDII,thatarealsorelevanttomitigatetherisksofdisorderlymarkets.Thoseincludetherequirementsforfirmstoestablishandmaintainadequateriskmanagementpoliciesandprocedureswhichidentifytherisksrelatingtothefirm'sactivities,processesandsystems.Whereappropriateandproportionatetothenature,scaleandcomplexityoftheirbusinessandthenatureoftheinvestmentservicesprovided,theinvestmentfirmshouldalsoestablishaninternalauditfunctionwhichisseparateandindependentfromtheotherfunctionstoevaluatetheadequacyandeffectivenessoftheinvestmentfirm'ssystems,internalcontrolmechanismsandarrangements.61.Astheriskstoorderlymarketsaremoresalientincaseofalgorithmictrading,MiFIDIIsetsoutspecificandmoredemandingorganisationalrequirementsforinvestmentfirmsthatengageinthisactivity.UnderArticle17ofMiFIDII,aninvestmentfirmthatengagesinalgorithmictradingmusthaveinplaceeffectivesystemsandriskcontrolssuitabletothebusinessitoperates,toensurethatitstradingsystemsareresilientandhavesufficientcapacity,aresubjecttoappropriatetradingthresholdsandlimits,preventthesendingoferroneousordersoranytradingthatiscontrarytoMARortotherulesofthetradingvenue.62.WheneveratransactionoranorderisflaggedaspotentiallysuspiciousandreportedtoNCAsunderMAR,apreliminarysupervisoryanalysisfollowsand,whereneeded,apreliminaryinvestigationiscarriedout.PreliminaryinvestigationsmayalsostartasaresultofflagsandalertsdirectlyoriginatedfromNCA’sownmarketsurveillancesystems.63.Inallthosecaseswherethepreliminaryinvestigationsconfirmthesuspicionofmarketabusebeingcommitted,NCAsmaylaunchaformalinvestigation,usingallthetoolsattheirdisposaldescribedintheprevioussection.64.Thepreviouslydescribedlinesofdefenceplayalsoaroleinthegeneralpreventionofmarketabuse,astheybringforwardadeterrenteffectduetothelikelihoodofmarketparticipants’wilfulmisconductsbeingdetected.65.Thefunctioningofthemarketsurveillanceatfirmlevel,attheleveloftradingvenuesandtheregulatorymarketsurveillancesystemsaredescribedindetailinthefollowingsections,eachoneforeveryjurisdictionwherecarbonmarketsarelocated.2366.Adescriptionoftheregulatoryfollow-upcarriedoutbyNCAsuponidentificationofalertsforpotentialmarketabuseoruponreceptionofaSTORisalsoprovided.3.3Germany3.3.1Systemsandproceduresatfirmlevel67.Asdescribedintheprevioussection,thefirstlineofdefenceinthefightagainstmarketabuseisatfirmlevel.UnderMAR,firmsareobligedtohaveinplacearrangements,systemsandprocedurestodetectandreporttheclientssuspicioustrading.68.BaFin’songoingsupervisionofinvestmentfirmsandcreditinstitutionsconsistsofseveralelements.ComplianceofinvestmentfirmswithinvestorprotectionandorganizationalrulesunderMiFIDIIisexaminedbypublicswornauditorsonBaFin’sbehalf.TheGerman“RegulationontheExaminationofInvestmentServicesEnterprises”(Wertpapierdienstleistungs-Prüfungsverordnung,WpDPV)containsseveralprovisionsoncontentoftheauditreportsandtheprocedure.TheauditalsocoverstherequirementslaiddowninArticle16ofMAR27.TheauditorsareexplicitlyrequiredtocommentontheirfindingsonArticle16ofMAR,andevenincaseofnofindingstheycannotstaysilentbutratheraffirmthefullcompliancewiththerelevantrequirements.69.Thoseauditsareusuallycarriedoutonayearlybasis.TheresponsibleBaFinofficerreceivesanotificationbeforethestartoftheauditprocessandmay,wheneverappropriate,demandtheappointmentofadifferentauditororeventakeovertheaudit.TheresponsibleBaFinofficercanalsosetspecificobjectivesfortheaudittofocuson.Theauditorhastoproduceanannualauditreport.70.TheresponsibleBaFinofficerevaluatestheabstractofthereportanddecideshowtofurtherproceedinlightofthefindings(e.g.examiningmoreindetailstheauditreportorenactingspecificsupervisorymeasuresinresponsetothefindings).Theresultsoftheaudit(togetherwithotherinformation,e.g.thatfromtheadditionalannualprudentialaudit)areincorporatedinadedicateddatabasewhereariskprofileforeachfirmisassigned.Suchindicatorisoneoftheelementsconsideredtosupportpossiblerisk-basedsupervisorymeasures.71.Risk-basedsupervisorymeasurescanbeinformationrequests(e.g.tofurtheranalysespecificfacts/situationswithinthescopeofArticle16ofMAR)orauditfocuses(forthethoroughassessmentofspecificareaslikeArticle16ofMAR),aswellason-site-measureslikeauditaccompaniments(toapplyownauditproceduresand/ormonitortheauditorsprocedures),specialauditsorotheron-site-visits(tofurtherassessspecificfacts/situations).72.Allinall,inthecaseofsupervisionoftherequirementsstemmingfromArticle16ofMAR,adeskofficertypicallyreceivesthenecessaryinformationfromtheannualMiFIDaudit27Accordingtopara.11Abs.1no.4WpDPV.24and/orfromthecolleaguesinthemarketintegritydirectorate,andthenassesseswhetherandwhatfurthermeasuresarenecessary.73.Apartfromtheoccasionalfindingsinthecaseofindividualfirms,inthelastfewyearsnoevidenceofsystematicdeficiencies/failingsofGermanfirmswasfoundinrelationtothesupervisionofarrangements,systemsandproceduresinplaceatfirmleveltoensurethecompletenessofSTORs,whichwashencenotconsideredasupervisoryfocusofBaFin.Thatalsogiventhatthepublicswornauditorsconductedathoroughreviewoftherespectivesystemsandproceduresin2016,whentheprovisionsofArticle16ofMARstartedapplying.3.3.2EEX’sownmarketsurveillance74.AtEEX,marketoversightissharedbetweenthemanagementboardandthemarketsurveillanceofficeoftheexchange.Whilethemarketsurveillanceofficeisbylawobligedtocollectandanalysealltrading,reportingandclearingdataonadailybasis,themanagementboardmonitorsandenforcescompliancewiththeapplicablesetofrulesoftheexchange.75.Bylawthetwobodiesareobligedtoactonlyinthepublicinterest.Withinitsmarketoversightactivities,boththemanagementboardandthemarketsurveillanceofficetreatemissionallowancesandderivativesthereofthesamewayasanyotherinstrumentofferedfortradingatEEX.76.Onceasuspicioustradingbehaviourhasbeenidentifiedorreported,orwhenotherirregularcircumstancesoccur,themanagementboardintervenesdirectly(throughe.g.suspensionoftrading,cancellingmiss-trades,etc.),toguaranteeorderlytradingatalltime.Thisincludese.g.tradinghaltsifapotentialbreachofArticle12and15ofMARisobservedintheorderbooks.Additionally,themanagementboardmaysuspendtradingparticipantsactingagainsttherelevantrules,includinge.g.Article12and15ofMAR,tomaintainorderlymarketoperation.77.Themarketsurveillanceofficeisanindependentpillarofthepublicexchangeandbylawapublicauthority.AccordingtoGermannationallawneithertheexchangeoperatornortheexchangemanagementcanexertanydirectinfluenceonthetypeandscopeofmonitoringcarriedoutbythemarketsurveillanceoffice.OnlytheexchangesupervisoryauthorityoftheStateofSaxony(SMWA)cangiveordersorinstructionstothemarketsurveillanceoffice.Althoughthemanagementboardmayrequestaspecialinvestigation,itcannotrequesttostopone.78.Themarketsurveillanceofficehaswide-ranginginvestigationpowers,maysendofficialrequestsofinformationandisallowedtoenterthepremisesofitsmembers.Theemployeesofthemarketsurveillanceofficearesubjecttoaprivilegedprotectionagainstdismissal.79.Themarketsurveillanceofficesupervisesonacontinuousbasistheexchangetradinganditssettlement,i.e.,pricedetermination,tradingactivities,marketbehaviour,suspiciousbehaviourofexchangeparticipants,accordingtoMAR,REMIT,theAuctioningRegulation,nationallawandtheexchange’srules.2580.ThemarketsurveillanceofficereportstoSMWAandtheexchangemanagementboard.BaFinreceivesthetransactionreportsunderMiFIR,monthlymonitoringreportsundertheAuctioningRegulationandisinformedaboutviolationsofMAR.81.Themarketsurveillanceofficeusesawell-establishedmonitoringtooltoperformcontinuoussurveillanceoftheEUAandEUAderivativesmarket.Itreceivesitsdataonordersandtradesfromalivefeeddirectlyfromthetradingsystem.Thestreamisconstantlyandautomaticallyanalysedtodetectsuspiciousactivities.Inaddition,themarketsurveillanceofficehasaccesstoandanalysesmarginsandP&LdatafromtheCCPECCandhasaccesstothepositionreportingdatafromallmembersandtheircustomers.Italsohasaccesstomasterdata,includingalgonotificationsandKnow-Your-Customerdocuments.82.EEXprovidestheCommission’sDirectorateGeneralforClimateAction(DGCLIMA)withreportsandmonitorsEUAandEUAAauctionsatEEXundertheAuctionRegulation.EEXprovidesDGCLIMA,appointingMemberStatesandtheGermancompetentauthorityBaFinwithacomprehensivereportabouttheprimarymarketauctionsonamonthlybasis.Thepurposeofthisreportingistwofold,asitisusedtofulfilEEX’smonitoringobligationsunderArticle53(2)oftheAuctioningRegulation,butalsoasabasisforMemberStates’reportsunderArticle10(4)oftheETSDirective.Thisreportingincludes,interalia,thebiddingbehaviourofallbiddersintheauctions,biddersperbiddercategory,coverratio,levelofconcentration,comparisontosecondarymarket,priceevolutionandanalysisandrawdata.ThatreportispresentedanddiscussedinamonthlycallwithDGCLIMA.TherelevantpartsofthereportsarepublishedonaquarterlybasisonthewebpagesofDGCLIMA.2883.SincetheintroductionofMAR,EEXhas-withinitsmarketoversightactivities-observednoinitialsuspicionofanyorder-bookbasedmisconduct.Ontheonehand,theprimarymarketauctionsareconductedinanauctionaccordingtoArt.5ofRegulation1031/2010(AuctionRegulation)wherebybiddersshallsubmittheirbidsduringonegivenbiddingwindowwithoutvisibilityoverthebidssubmittedbyotherbiddersandwhereeachsuccessfulbiddershallpaythesameauctionclearingpriceforeachallowanceregardlessofthepriceofhisbid.Ontheotherhand,theemissionsderivativemarketsarehighlyliquidandthereforealsoveryrobusttowithstandmarketmanipulation.Theimpactofonesingletraderonthepricesisalsorathersmall.3.3.3Supervisorymarketsurveillance84.SMWAisresponsibleforthelegaloversightoftheexchange,includingthemarketoperatorandthebodiesoftheexchangesuchasmanagementboardandmarketsurveillanceoffice.SMWAhastheauthoritytogivebindinginstructionstoallthementionedentitiesandbodies,ensuringthattheorganizationalrequirementsforoperatinganexchangestipulatedbynationalandinternationallaw(e.g.Article16ofMAR)arerespectedatalltimes.28Auctionreportsunderhttps://ec.europa.eu/clima/eu-action/eu-emissions-trading-system-eu-ets/auctioning_en2685.EEX-entitiesandrelatedbodiesreporttoSWMAonaregularbasisaswellasonanad-hocbasiswhenevernecessary.ThereportingincludesanyindicationofirregulartradingbehaviouraswellasanyissuerelatedtoEEX’sIT-systems(e.g.tradingsystem,marketsurveillancesystemsetc.).SMWAdoesnotrunitsownmarketsurveillanceIT-systemssincealltherelevantdataiscapturedandevaluatedbythemarketsurveillanceofficeand,whererequired,transferredtoBaFin.86.BaFinisthecompetentauthoritywithinthemeaningofArticle22ofMAR.Inordertofulfilthisobligation,BaFinfollowsupontheSTORsreceivedunderArticle16ofMARandotherexternalinputconnectedtopotentialmarketabuse.Furthermore,proprietaryalgorithmicdataanalysisofthetransactiondatareceivedunderArticle26MiFIRisperformed.87.BaFinandSMWAexchangeinformation(includingthoserelatedtoMAR)andmutuallysupporteachotherwheneverhelpfulforthefulfilmentofeachother’stasksandduties.Suchexchangedoesnotfollowafixedprotocolbutisratheronacase-by-casebasis.88.Collectivelyandsimplified,thesystemofsupervisionofexchangetradinginGermanycouldbedescribedasfollows.Theexchangeasapublicinstitutionanditsbodiesensureorderlytradingatalltimes.Themandateoftheexchangesupervisoryauthorityisfocusedbutnotlimitedtotheorganizationalset-upoftheexchange’soperationasrequiredbynationalandinternationallegislation,suchasMiFIDII,MiFIRandtherelateddelegatedregulations.Furthermore,BaFinisthecompetentauthoritytoenforcebreachesofMAR.89.Reportingobligationsestablishedbylawensuretheexchangeofinformation(includingthoserelatedtoMAR)betweenEEX,SMWAandBaFin.BaFinandSMWAfurthermoreareobligedtomutuallysupporteachotherwheneverhelpfulforthefulfilmentofeachother’stasksandduties.3.3.3.1SuspiciousTransactionandOrderReports(STORs)receivedandotherexternalinput90.STORsfrommarketparticipantsarereceivedbyBaFinviaanelectronicportalthatallowstheuploadofthereports.STORsfromotherNCAsaretransferredviaspecificelectronicplatforms.Inputsfromotherpartiesarereceivedviamail,emailoraspecificportalfor(anonymous)whistle-blowers.91.AllincomingSTORsandotherinputswillundergoatwo-tierprocess.InafirststepallSTORsandotherinputsaresiftedandvalidatedwithregardtotheirrelevance.Thosecaseswithhighsignificancearefurtherinvestigatedinasecondstep.92.Anysuchinformationreceived(intheformofSTORsorotherobservations)whichgivesreasontosuspicionofmarketabusewillleadtoanin-depthanalysis.Inordertoassessthecaseinitsentirety,furthersourcesofintelligenceareexplored.ForEUAandderivativesthereof,newsandinformationrelevanttothecasearegatheredandassessedwithregardtotheirrelevancetothecarbonmarketandtheirpotentialpriceandmarketimpact.93.Priceandvolumedataoftheconcernedcarbonmarketproductsintherelevantperiodareanalysedwithrespecttounusualmovementsorpeculiarities.Furthermore,27transactiondataisexaminedindifferentdirections.Transactionsofmarketparticipantswithunusuallyhighmarketsharesintherelevantperiodwillbescrutinised.Tradingpatternsofactivemarketparticipantswillbeexamined.94.Oftenitisnecessarytosupplementtransactiondatabyorderdatainordertoevaluatetheordersandtradingbehaviourindetail.SuchdataisrequestedfromtheEEXonanadhocbasisandincludedintotheanalysis.CarbonmarketpositiondataavailabletoBaFinisanotherpieceofinformationusedwhenevaluatingthepositioningofcertainmarketparticipantsovertime.95.Shouldsuchinvestigationsleadtotheassumptionthatmarketabusehastakenplacethecasewillbebroughttotheattentionofthepublicprosecutor’soffice.3.3.3.2ProprietaryAlgorithmicDataAnalysisoftransactiondata96.InordertomonitortheEUAmarkets,inadditiontoproceduresdescribedaboveBaFintakesapredominantlydatadrivenapproach.ItmonitorstheauctionandspottradinginemissionallowancesandderivativesthereofforwhichBaFinistherelevantcompetentauthorityandthusgainsacomprehensiveunderstandingoftheemissionallowancestradinginBaFin’sjurisdiction.97.Atitscore,theapproachisasemi-automatedsurveillancesystemthatisbasedonthetransactionreportsreceivedunderArticle26ofMiFIRforbothonandoff-venuetradingaswellastransactionreportsregardingauctionsasperArticle36oftheAuctioningRegulation.Thetransactiondataissupplementedwithadditionaldataaboutmarketparticipants.Inaddition,BaFinmightintegrateadditionaldatasourcesinthefuture.98.BaFin’ssurveillancesystemreliesontwocomplementaryparts:ageneralmarketmonitoringtogatheroverallmarketobservationsatamacrolevelaswellasanalgorithm-basedsurveillancesystemtodetectsuspiciousbehaviouratmarketparticipantlevel.99.Thegeneralmarketmonitoringaimsatcapturingoveralltrendsanddevelopmentsonanaggregatedlevel.Therefore,BaFinanalysesthedistributionoftradingvolumes,longandshortpositionsandthenumberofactivemarketparticipantsconsideringboththeauctionandthesecondarymarketforEUAsaswellasderivativesthereof.100.Thealgorithm-basedsurveillancesystemusesasetofalgorithmsdesignedbyBaFintoidentifypossiblemarketabuse.Itcombinespre-definedscenarioswithoutlierdetectionmethodsinordertodetectunusualtradingbehaviour.101.Forexample,thesystemusesapre-definedtop-downapproachthatlinksmacro-levelobservationswithmicro-leveltransactiondataanalysis.Inparticular,ifthesystemdetectsasignificantpricemovementwithoutanyreasonableexplanation,analgorithmassesseswhetherthatpricemovementmayhavebeencausedbyunusualtradingactivities.Therefore,itidentifiesmarketparticipantswithsignificantmarketsharesandcheckswhethertheirtradingbehaviourdeviatedfromtheirusualonebyconductingalongitudinalanalysistakingintoaccounttheiractivitiesinandoutsidetheobservationperiod.28102.Thistop-downapproachissupplementedbyfurthermicro-levelsearchingroutines.Forexample,thesystemcalculatesactivityindicesinordertodetectmarketparticipantswithelevatedtradingactivity.Inaddition,thesystemconductsaperformanceanalysisattransactionleveltorankmarketparticipantsaccordingtotheirtheoreticaltradingprofitsandlossesincertaintimeintervals.Basedonthoserankings,thealgorithmdetectsmarketparticipantsthatrepeatedlyoutperformtheaveragemarketparticipant.103.Althoughsignificantmarketshares,increasedactivitiesorhighprofitsalonedonotperseindicateanyunlawfulbehaviour,theycanbethebasisforfurtheranalysis.Thus,theoutcomesofthosesurveillancealgorithmsdescribedabovearereviewedand–ifnecessary–furtheranalysedbyBaFin’smarketsurveillanceanalystsonacase-by-casebasis.104.Takingintoaccountnewdevelopmentsandfindings,BaFin’smarketsurveillancemethodologyandthecalibrationofitsvariousalgorithmsisundercontinuousrefinementandrevaluation.3.3.3.3Analysisofpositiondata105.BaFinreceivesonadailybasispositionreportsonEUAsandderivativesthereofinaccordancewithArticle58(1)(b),(2)ofMiFID,implementedintonationallawby§57WpHG(Wertpapierhandelsgesetz–SecuritiesTradingAct).EEXreportspositionsinexchange-tradedinstrumentswhereasinvestmentfirmsprovidereportsineconomicallyequivalentOTCemissionallowancesandderivativesthereof.EUAsandderivativesthereofareconsideredeconomicallyequivalenttoinstrumentstradedonatradingvenuewheretheyhaveidenticalcontractualspecifications,termsandconditions.106.Incontrasttootherreports,positionreportsdorevealtheendclientofaposition,renderingthemuniqueinthereportingregime.Initiallydesignedtoenablecompetentauthoritiestosupervisecompliancewithpositionlimits,positionreportstodayalsorepresentausefultooltoidentifybeneficialowners.BesidesBaFin,marketsurveillanceatEEXalsomakesuseofpositionreports.3.3.4Outcomeofcarbonmarketsurveillance:STORsreceivedandpreliminaryinvestigations107.Sofar,thepreliminaryanalysiscarriedoutdidnotshowanypotentialmarketabuseandthus,basedontheoutcomeofthesurveillancesystem,noformalinvestigationhasbeenlaunched.108.OneSTORbroughttoBaFin’sattentionwasconcernedwiththesuspicionofpossibleinsidertradinginconnectionwithnon-publicinformationregardingdraftedEUproposalsofthebroaderEUGreenDealpolicygoalsandtheFitfor55Package.Investigationsintothecaseledtotheconclusionthattherelevantinformationwasalreadydisclosedtothepubliconthedayaheadoftheallegedinsidertradingactivity.Hence,theinformationinquestiondidnotqualifyasinsideinformationunderMAR.Moreover,theinformationwouldnothavebeensuitabletoexplainanexpectednegativepriceimpactontheEUAfuturesasallegedintheSTOR.Furthermore,transactiondataonEUAinstruments29tradedonEEXintherelevantperioddidnotshowanysignsofabnormalpricemovementsorpositionstakenbymarketparticipants.Therefore,thecasedidnotwarrantfurtherinvestigation.109.AhintregardingpossiblemarketmanipulationintheEUcarbonmarketwasgiventoBaFinbyamarketparticipant.Theinformantclaimedthatduetomissingpositionlimitsandtheaccessofawidevarietyofparticipants(specificallynon-complianceentities)marketmanipulationwaseasilyfeasible.Analysisabouttheallegationsrevealednoevidenceoftheindicatedpricemovementsandneitherdidfurtherexaminationsofthereportedtransactionsduringtherelevanttimeperiodsubstantiatedtheallegations.3.4TheNetherlands110.AlsointheNetherlandsmarketsurveillanceofsecondarymarkettradingofEUA-derivativesisorganizedalongthreelinesofdefence.111.Thefirstlineconsistsofbrokersandinvestmentfirmsthatexecutetradesonbehalfofclients.UnderArticle16ofMAR,everypersonthatprofessionallyarrangesorexecutestransactionsinfinancialinstrumentsmustestablishandmaintaineffectiverules,systemsandprocedurestoactivelymonitor,detectandreportsuspiciousordersandtransactions.Ifsuchapersonhasareasonablesuspicionthatanorderand/ortransactioninafinancialinstrument,whetherplacedorexecutedonoroutsideatradingplatform,couldconstituteinsiderdealing,marketmanipulationorattemptedinsiderdealingormarketmanipulation,theyareunderthelegalobligationtonotifytheAFMwithoutdelay.112.ThesecondlineofdefenceconsistsofICE-Endexsurveillancesystemtoprevent,detectandreportsuspicioustradingbehaviour.113.Asathirdlineofdefence,theAFMconductsmarketabusesupervisionthroughitsownsurveillancemechanism,basedondata-drivendetection,resultinginvariousalertswhichareused,incombinationwiththeSTORssubmittedbymarketparticipants,forfurtheranalysisandpossiblefollow-upinvestigations.3.4.1Systemsandproceduresatfirmlevel114.InvestmentfirmsandbrokershavearesponsibilityunderMARwithregardtothedetectionofmarketabuseandaresubjecttotheobligationtoreportSTORstotheAFM.115.AspointedoutintherecentMarketWatch29,theobligationtosubmitSTORsisasupervisorypriorityfortheAFMintheareaofmarketabusesupervision.116.Asaresult,inordertoensuretheproperandeffectivefunctioningofthefirstlineofdefence,theAFMcloselysupervisestheinvestmentfirms’systemsandprocedurestodetectandreportmarketabuse.Inparticular,theAFMisrequestingperiodicauditreportsregardingsystemsandcontrolsandfollowingupwheneverneededtoincreasethelevelofsurveillance,qualityandquantityofSTORs.29SeeAFMMarketWatch#4@AFMMarketWatchTopicsAFMAFMProfessionals303.4.2ICEEndex’sownmarketsurveillance117.BothEUA-futuresandoptionsaretradedonICEEndex.TheratiobetweenEUAfuturesandEUAoptionstradedatICEEndexhasbeenstableatcirca2.5,withfuturesbeingtheleadingproductICEEndexisoffering.EUAoptionsaremostlytradedinblocktrades,whereasforEUAfutures,morethan80%istradedonscreen.Mostactivityinthefuturesmarketisintermfuturesinsteadofdailyfutures.118.ThegeneralobjectiveoftheICEEndexmarketsurveillanceactivitiesistosupportthefairandorderlyoperationofitsmarketsbycloselymonitoringthem,therebyallowingittodetectirregularitiesandsuspiciousbehaviourthatmayindicateanyformofmarketabuse.Inordertoachievethis,ICEEndexappliesbothrealtimemarketmonitoringandt+xanalysisusingaproprietarysystemthatprovidesalgorithmicallygeneratedalerts.Inaddition,ICEEndexassessesunusualmarketandpositiondevelopments,eveninsituationswherenoalertshavebeentriggered.119.Furthermore,ICEEndexanalysesalertsgeneratedbyitssurveillancesystems.Incaseanalertconstitutespotentialmarketabuse,itisdiscussedbydedicatedstafftodeterminewhetherthereisasuspicionofmarketmanipulationtobereportedasamarketobservationorSTORtotheAFM.AmarketobservationhasalighterdegreeofsuspicioncomparedtoaSTOR.120.Nexttotheintegrityofmarkets,robustnessandproperfunctioningofthemarketinfrastructureiskey.Licensing,therulebookandchangesthereofbyICEEndexhavetobeapprovedbyAFMtoensurecontinuityandrobustnessofthemarketinfrastructureoperation.Boardmembersareassessedforsuitability.Transparencywaiverapplicationshavetobeassessedandapproved.AnimportantadditionalcontrolforensuringfairandorderlymarketsisICEEndex’smemberonboardingprocess.OnlyverifiedprofessionalpartieswithprovenknowledgeandadequatecapabilitiesareallowedtotradeonICEEndex’swholesalemarkets.121.Moreover,ICEEndexshareswiththeAFMinformationaboutthecontextbehindactivatedtradinghaltsandincidentsthataffectthesmoothfunctioningofthemarket.ICEEndexalsoconductsanannualinternalaudittoassesswhethereffectivemarketsurveillancecontrolshavebeendesignedandimplemented.ThefindingsfromtheauditaresharedwiththeAFM.3.4.3Supervisorymarketsurveillance122.TheAFMusesseveralsupervisorymethodstoperformmarketsurveillanceontheEUAderivativesmarket,whichisbasedintheNetherlandssinceJune2021.Firstofall,theAFMperformsdata-drivenmulti-assetclassmarketsurveillancethroughanalgorithm-basedsurveillancesystem.AFMisfinalizingtheimplementationoftheEUAmodulewithinthissystem,thatisbasedonalgorithmsdesignedbytheAFMandontransactiondatathatwillbesentdirectlyfromICEEndextoAFM.123.Forthemoment,theAFMonlyreceivesMiFIRtransactionreportingdataonastructuralbasisasinputforitssurveillancesystem,whilealsoorderdataconstituteimportant31informationforeffectivesurveillance.Currently,theAFMcanonlyobtainorderdataviaad-hocrequeststobesenttoICEEndex.124.Adedicatedteamconductsday-to-daysupervisionoftheEUA-markets,includingdetectionofpossiblemarketabuseandanalysesifanyalertsistobefurtherinvestigated.EMIRandCommodityPositionReportingSystemdataisusedtokeepageneraloverviewofthemarketanditstrends.125.Inadditiontothedata-drivenapproach,theAFMusesSTORsasanimportantsourceofinformationforitsmarketabusesupervision.126.WheneverAFMreceivesaSTOR,expertsassessit.TheAFMassessmentcanresultineitherdismissingtheSTOR,issuinganinformalwarning,orenrichingtheSTORwithdataandinformationfromrelevantmarketparticipants.Incasesuchfurtheranalysisconfirmssuspicioustradingbehaviour,theAFMmaydecidethatthecasequalifiesforaformalinvestigation.Investigationsgenerallyrequireasubstantialamountoftimeandcanresultinsanctionsandsupervisorymeasures.127.Asdescribedintheprevioussection,akeyroleisalsoplayedbytradingvenues.ICEEndexshouldhaveeffectiveproceduresinplaceunderitslegalobligationtomaintainafairandorderlymarket.Asaresult,thetradingvenuecarriesoutreal-timeandT+1monitoringandisexpectedtosubmitSTORswhenevertheynoticesuspicioustradingbehaviourontheirplatform.TheAFMorganizesquarterlysupervisorymeetingswithICEEndexwherethealertsgeneratedbytheautomatedsurveillancesystemofICEEndexarethoroughlydiscussed.Uponrequest,ICEEndexsharesEUAderivativesorderdatawiththeAFMtosupportthematicmarketsurveillanceinvestigations.128.TheAFMMarketWatchcontainsthefirstmarketobservationsbasedonthereceivedtransactiondata.AFMobservedthat50marketparticipants(outofafewhundreds)areresponsibleforroughly90%ofthecarbonmarketvolume.Asareferenceforvolume,inDecember2021,ICEEndexpublishedone-sidedtradedvolumesofaround1.819.500lotsinEUAFutures,EUAFuturesonoptionsanddailyFuturescombined30.Marketparticipantsarediverseasregardsnationalityandtradecategory(suchasinvestmentfirms/banks/utilitytradingfirms/proptradingfirms).AspartofitssupervisionoftheEUAderivativesmarkets,theAFMalsostartedsupervisionofthecompliancelevelsofthosemarketparticipants.3.4.4Outcomeofcarbonmarketsurveillance:STORsreceivedandpreliminaryinvestigations129.In2021theAFMhasreceivedfourEUA-basedSTORsandonemarketobservation.TheSTORsarerelatedtopotentialmarketmanipulationbasedonlayeringandspoofing,whichistradingschemebasedonsubmittingmultipleorlargeorderstotradeoftenawayfromthetouchononesideoftheorderbookinordertoexecuteatradeontheothersideoftheorderbookand,onlyoncethetradehastakenplace,theotherorderswithno30https://www.theice.com/marketdata/reports/23832intentiontobeexecutedaredeleted.Ontheotherhand,themarketobservationislinkedwithdisclosureofpotentialinsideinformation.130.WithrespecttotwooutofthefourSTORsreceivedandthemarketobservation,theAFM’spreliminaryinvestigationsdidnotprovideevidenceofmarketabuse.PleasenotethattheothertwoSTORsarestillunderinvestigationbytheAFM,henceitisnotpossibletoelaborateonthefurtherstepsthatarecurrentlybeingconsidered.3.5Norway3.5.1Systemsandproceduresatfirmlevel131.AccordingtoArticle16ofMAR,personsprofessionallyarrangingorexecutingtransactions,includinginvestmentfirms,shouldestablisharrangements,systemsandprocedurestomonitor,detectandreportSTORstoNCAs.Thosearrangements,systemsandproceduresshouldbeappropriateandproportionateinrelationtothescale,sizeandnatureoftheirbusinessactivity.132.Reportingentitiesnotonlyhavetoreporttransactionscarriedoutonatradingvenue,butalsoOTCtransactionsconcerninginstrumentsinscopeofMAR.133.Thearrangementsandproceduresaretoensureanappropriatelevelofhumananalysisinthemonitoring,thedetectionandtheidentificationoftransactionsandordersthatcouldconstituteinsiderdealingormarketmanipulation.Investmentfirmsaretoorganiseandprovideeffectiveandcomprehensivetrainingtotheirstaffinvolvedinthoseactivities.Suchtrainingshouldtakeplaceonaregularbasisandshouldbeappropriateandproportionateinrelationtothescale,sizeandnatureofthebusiness.134.Thearrangements,systemsandprocedures,whichshouldbeclearlydocumentedinwriting,aretobeassessedregularly,atleastthroughanannuallyconductedauditandinternalreview.135.InvestmentfirmsarelicensedandsupervisedbyFinanstilsynet.Thesupervisionencompassesboththeinvestmentfirms'operationsandcompliancewithorganisationalrequirements,interaliathelegalrequirementsrelatedtoitsarrangements,systemsandprocedures.136.Tothisend,Finanstilsynetmaycarryoutinspections(full-scaleinspectionsorthematicinspectionsaddressingspecificissues).Aspartofitssupervisoryactivities,Finanstilsynetregularlyprovideinvestmentfirmswithguidanceandclarificationsinareaswherespecificationsareneeded.3.5.2NasdaqOslo’sownmarketsurveillance137.NasdaqOslooffersasecondarytradingmarketfordaily,quarterlyandyearlyfuturesonEUAs.Tradedvolumesofsuchfuturesarehoweverlimited.Intheperiodfrom1July2021to31December2021only250transactionswereexecuted.NasdaqOslodoesnottradeoptionsonEUAs.33138.NasdaqOslohasestablishedanindependentsurveillancedepartmenttoensureacontinuousreal-timemonitoringofallitslistedproducts,includingEUAderivatives.Adequateresourcesareassignedtothesurveillancedepartmentforittoperformeffectivesurveillanceinrelationtopotentialmarketabuseorbreachesofotherrulesandregulations.139.NasdaqOslousesthesurveillancetechnologyNasdaqMarketSurveillance(formerlynamedSMARTS)tomonitoralltradinginrealtime,triggeringalertsintheeventofunusualactivityand/orpricemovements.Thesurveillancedepartmentalsosubscribestorelevantnewsandanalysestoassessthepricedevelopmentofitslistedproductsandtodetectpossiblemisconducts.Further,thesurveillancedepartmentsubscribestopricedatatradedonothertradingvenuestocrosscheckthatwiththedevelopmentonitsowntradingplatform.ThatisespeciallyusefulforthemonitoringofitsEUcarbonderivativessinceabigmajorityoftheactivityisconductedonothertradingvenues.140.NasdaqOslo’sarrangements,systemsandproceduresareestablishedtodetectpossibleinsidertradingormarketmanipulation.Suspiciousactivitiesarefurtherinvestigatedbythesurveillancedepartmentthatnotifiesthecompetentauthority(throughSTORs)whereithasareasonablesuspicionthatanorderortransactioncouldconstituteinsidertrading,marketmanipulationorattemptedinsidertradingormarketmanipulation.141.Additionally,inpresenceofdetectedsuspicioustradingaheadofexecution,NasdaqOslo’sarrangements,systemsandproceduresallowforthepreventionanddetectionofpotentialmarketabusefromtakingplaceasrequestedunderArticle16(1)ofMAR.AvitalpartofpreventingmarketabuseisMarketSurveillance’scommunicationswithmarketparticipantsrelatedtoobservedtradingactivity.Marketparticipantsare,uponwrittenrequestbytheexchange,underanobligationtoprovideassoonaspossibleallinformationtheexchangeconsidersrelevantinrespectofitsroleforthesurveillanceoftheMarketConductRulesandotherapplicablelawsandregulations.142.Throughthosecommunications,MarketSurveillancecouldexpresstheirviewontheactivity,pointtowardsrelevantregulationsand/orgivefeedbackonpotentialimprovementstoensurethatmarketparticipantsdonot(unintentionallyorintentionally)carryoutsuspicioustradingactivityinthefuture.143.NasdaqOslohasalsoimplementedeffectivesystemstofulfillArticle48ofMIFID2provisionsregardingcircuitbreakersandrejectionofordersthatexceedpre-determinedvolumeandpricethresholds.144.NasdaqOsloissubjecttosupervisionbyFinanstilsynet,whichaimstoensurethattheinstitutionactsinanappropriateandpropermannerinaccordancewiththeapplicablelegislation,includingMAR.Tothisend,Finanstilsynetmaycarryoutinspectionstoreviewthetradingvenue'sinternalsystems.Furthermore,meetingsbetweenFinanstilsynetandNasdaqOsloareregularlyheldtodiscussmarketsurveillancetopics,includingpossiblealertsgeneratedbyNasdaqOslo'ssurveillancesystems.343.5.3Supervisorymarketsurveillance145.Finanstilsynethasappliedmultiplemarketsurveillancesoftwaresolutions.Forpositionreportingmonitoringandanalysis,Finanstilsynetusesaninternaldevelopedsolutioncalled"PositionMiner".ThisITsolutionusesthedailyreportsofthepositionreportingtographicallyillustratealltheconsolidatedpositionsofallentities.Adedicatedstaffisassignedtomonitorandoperatethispositionsurveillancesystem.146.TheprimarydatasourceforthesurveillancesystemsisthetransactionreportingunderArticle26ofMiFIR,receivedfromtheinvestmentfirmsandtradingvenues.ThisinformationincludesdetailsaboutalltransactionsontradingvenuesbutalsoOTC.Informationinthesereportsincludee.g.LEI-codes(identifiercodes)ofbuyersandsellers,executinginvestmentform,timeanddate,price,volume,instrumenttypeandidentificationcode(ISIN).147.FinanstilsynetreceivesSTORsandothernotificationsregardingpotentialmarketabusefromtradingvenues,investmentfirmsandforeignsupervisoryauthorities.AllSTORsreceivedareanalysedbyFinanstilsynet.148.ShouldanSTORorthealertsproducedbyFinanstilsynet’surveillancesystemevidenceapotentialmarketabuse,Finanstilsynetmayopenaninvestigation.Whereaninvestigationleadstotheconclusionthatmarketabusehastakenplace,Finanstilsynetmayadoptsanctions(e.g.financialpenalties)orbringthecasetotheattentionofthepublicprosecutorforpossiblecriminalproceedings.149.IncaseofpotentialmarketabusecarriedoutontheterritoryofanotherEEAState,FinanstilsynetwillrequesttherelevantNCA’sassistanceduringtheinvestigations.3.5.4Outcomeofcarbonmarketsurveillance:STORsreceivedandpreliminaryinvestigations150.FinanstilsynethasreceivednoSTORsrelatedtoemissionallowancederivatives.ThisislikelyduetothefactthatthenumberoftradesofsuchderivativesatNasdaqOsloisverylimited.FinanstilsynethasnotadoptedsanctionsforviolationofmarketabuserulesrelatedtoEUAsderivatives.MARenteredintoforceinNorwegianlawon1March2021.FinanstilsynethastodatenotsanctionedanyinfringementsofMARbyemissionallowancemarketparticipants.4Carbonmarketanalysis151.ThissectionfocusesonanalyticalaspectsconcerningEUcarbonmarketsandtradingofEUemissionallowances.Itincludesashortsurveyoftheeconomicliteratureimmediatelyrelevanttothisreport(Section4.1),followedbyanoverviewofkeycarbonmarketdevelopmentsinrecentyears,includingpricesandsupply/demanddynamics(Section4.2).ThethirdpartpresentstheresultsofthevariousanalysesundertakenbyESMAforthepurposeofpreparingthisreportonEUA-relatedinformationreportedunder35variousEUregulatoryframeworks(Section4.3).Thelastpartsummarisesthesefindingsandconcludesthemarketanalysispart(Section4.4).4.1Literaturereview152.TherelevantliteratureonpriceformationintheEUETSfocusesontheimpactofpublicpolicy,thedemand-sidedrivers,andtheroleoffinancialsinthismarket.Afirsttakeawayisthatcarbonpricesappeartoreacttopublicsectorannouncements.Conradetal.(2012)findthatreleasingannouncementsonEUAsbytheEuropeanCommissionhaveanimpactonEUAprices31.Morerecently,Friedrichetal.(2020)provideempiricalevidenceoftheimpactoftheMarketStabilityReserve(MSR)onparticipantsbeliefs,likelyleadingtoanoverreactionthatdestabilisedthemarket32.153.AsecondthreadamongtheanalysescarriedoutonEUApricesistherelationshipbetweencarbonpricesontheonehand,andcoal,gasandoilpricesontheotherhand.Alberolaetal.(2008)33showthatEUAspotpricesreacttoenergypriceswithforecasterrorsandtounanticipatedtemperaturechanges.Indeed,inputpricesaresupposedtoinfluenceEUApricesinanefficientmarket(Kochetal.,2014)34.Otherstudies,suchasAatolaetal.(2013)35,documentasteadyandpositiverelationshipinthefirstfiveyearsoftheEUETSbetweendailyEUAforwardpricesandGermanelectricityandUKgasprice,andanegativerelationshipwithcoalprices.Carneroetal.(2018)documentthattheforwardpricesofEUA,coal,gasandBrentoilarejointlydeterminedinequilibrium,withspotpricesmainlydrivenbysupplyanddemandinenergymarkets36.Incontrast,Kochetal.(2014)findnoclearevidenceofarelationshipbetweenfuelandcarbonpricesduringtheEUETSpricedropinmid-2008,highlightinginsteadtheimpactofeconomicactivity37.Takentogether,thesefindingssuggestthatthedriversofEUApricechangesandthedirectionoftherelationshipwithothercommoditypricesseemtovaryovertime.ItshouldbenotedhoweverthatmostofthesestudieswereconductedpriortotheintroductionoftheMSR,whichhadamajorimpactontheEUcarbonmarket.154.AthirdstreamoftheliteratureoncarbonmarketsliesinthestudyoftradinginEUAs.CludiusandBetz(2020)documentedthatthemajorityofEUAtradingtakesplaceinthefuturesmarket38.Pirrong(2009)arguedthatsincecomplianceentitiesbuyEUAsintheauctionmarketandholdthemtosatisfyregulatoryrequirements,theactualnumberofallowancesavailablefortrademaybefarlowerthanthetotalamountoutstanding,thus31“ModellingandexplainingthedynamicsofEuropeanUnionallowancepricesathigh-frequency”(2012),EnergyEconomics,34(1):316-32632“Rulesvs.discretionincap-and-tradeprograms:EvidencefromtheEUemissionstradingsystem”(2020),WorkingPaper8637,CESifo33“PricedriversandstructuralbreaksinEuropeancarbonprices2005-2007”(2008),EnergyPolicy,36(2):787-79734“CausesoftheEUETSpricedrop:Recession,CDM,renewablepoliciesorabitofeverything?Newevidence”,EnergyPolicy,73:676-68535“PricedeterminationintheEUETSmarket:Theoryandeconometricanalysiswithmarketfundamentals”,EnergyEconomics,36:380-39536“ModellingthedynamicsoffuelandEUallowancepricesduringPhase3oftheEUETS”(2018),Energies,11(11):1–2337“CausesoftheEUETSpricedrop:Recession,CDM,renewablepoliciesorabitofeverything?–Newevidence”,EnergyPolicy,73:676-68538“TherolesofBanksinEUemissionstrading”,EnergyJournal,41(2),275-9936creatingopportunitiesforpotentialmarketmanipulationbyuseofderivativestrategies39.Whilethemarkethasevolvedovertheyears,thepointthatthenumberofallowancesavailablefortradingissubstantiallylowerthanthenumberofallowancesincirculationholdstrue.QueminandPahle(2022)40furtherlookintothisquestionandinvestigateEUAfuturestradingactivity.Whilefuturespositionsaremostlyheldforthepurposeofhedgingandmarket-making,theyhighlightthegrowingnumberofspeculativepositionsbothfromfinancialandcommercialtraders.Theauthorsfurthershowthatmarketspeculationhasincreasedsince2018whiletheyunderscorethatthecurrentlimitationsregardingthequality,harmonisationandavailabilityofpubliclyaccessibledataimpedefurtheranalysisoftheimpactthatspeculationlevelshaveonprices.4.2Evolutionofcarbonpricesandvolatility155.Thissectionreliesondataobtainedfromvariouscommercialdatasources,focusingonmajoreventsandprice-relateddevelopmentsinthemostliquidEUAspotandfuturesmarketsuntilthebeginningofMarch2022.4.2.1Spotprices41156.Aftertradingformanyyearsbelow10EURpertonneofCO2,EUApricesexperiencedafirstmajorincreasefrom8EURinJanuary2018to30EURinJuly2019.Afterfluctuatingbetween20and30EURfornearlytwoyears,inDecember2020,EUAsdecisivelybrokethe30EURmarkandquicklyroseupto63EURinOctober2021.Afterabriefpause,therallyresumed,leadingtoarecordhighof96EURinFebruary2022,followedbyasharpsell-offatthebeginningofMarchpushingpricesbelow70EUR.157.ComparingdailysettlementpricesfromEEXandICEEndex,wheremostofthetradingtakesplace(seeSection4.3),nomajordifferencescanbeobservedwithanaverageabsolutedifferenceof0.015EUR–suggestingtheabsenceofcleararbitrageopportunitiesbetweenthetwomainvenues.39“Marketoversightforcap-and-trade:Efficientlyregulatingthecarbonderivativesmarket”(2009),PolicyBrief09-04,TheBrookingInstitution,EnergySecurityInitiative40“Financialthreatentounderminethefunctioningofemissionsmarkets”(2022)41Inthissection‘spot’referstobothspotcontractstradedonEEXanddailyfuturestradedonICEENDEX(seeSection2).37Figure1:SpotpricesincontinuoustradingatEEXandICEEndex,inEUR/tCO2.Source:Refinitiv,ESMA.158.SincethelaunchoftheEUETSin2005,severalotherjurisdictionshaveintroducedcapandtradesystemswiththeobjectivetoreduceregionalgreenhousegasemissions,althoughthesesystemsdifferfromtheEUETSintermsofscopeanddesign.Fiveyearsago,allexistingETSwerepricingcarbonbetween5and15EUR/tCO2andpriceswereuntil2020approximatelyfollowingthesamesteadyupwardtrend.EUcarbonpricesevenlaggedbehindthoseofotherregions,untiltheEUETS’revisionin2018ledEUAstoriseabovepricesinotherjurisdictions(seesection4.2.5foradditionaldetailsonsupplyanddemandfactors).42159.WhentheCOVID-19pandemicreachedEuropeandtriggeredabroadmarketsell-off,carbonpriceswereaffectedaswell,reflectingthesharpslowdownineconomicactivityandtheexpecteddeclineinglobalenergydemand.EUAsplummetedfrom23to15EURinjustafewdays.However,pricesrecoveredquicklyandfurtherincreasedfromDecember2020followingtheannouncementofmorestringentclimatepolicyobjectivesintheEU,leadingtoexpectationsofatightersupply.160.AstheeconomicrecoveryintheEUtookholdin2021,anotherfactorsetin.Heightenedutilitydemandandrisinggasandpowerprices43graduallyincreasedtherelativeattractivenessofcoalasasubstituteforgas-firedenergyproduction.However,withahighercarbondioxideemissionsfactorthangas,coalalsorequiresthepurchaseofadditionalEUAs,raisingdemandandfurtherdrivingcarbonpricesup.42CharlotteRoig-Ramos:BoomingPricesontheEuropeanEmissionTradingSystem:FromMarketOversupplytoCarbonBubble?,IFRI,8October2018.43CamillaHodgson:Europeangascrunchpushesupcarbonprice,FinancialTimes,4October2021&StephenStapczynski:Europe’sEnergyCrisisIsComingfortheRestoftheWorld,Too,Bloomberg,27September2021.0102030405060708090100Jan-18Jul-18Jan-19Jul-19Jan-20Jul-20Jan-21Jul-21Jan-22EEXICEEndex38161.ThemarketturmoilinMarch2022relatedtothewarbetweenRussiaandUkrainedisruptedthisdynamic,withEUApricesdecliningby30%injustafewdayswhilenaturalgaspricesreachedall-timehighsinEurope.Asfarastheimpactofthewaronthecarbonpriceisconcerned,furtheranalysiswillbenecessaryinthefuturetodeterminetheprecisetransmissionchannels.ThereareindicationsthatthedeclineinthecarbonpricemaybeassociatedwithconcernsaroundpossiblegassupplydisruptionsorimportbansleadingtoareducedneedforEUAs,combinedwithgeneralassumptionsconcerninganeconomicdownswingandEUcountriesexitingfossilfuelsatanearlierpointintime.AmoreimmediatereasonforthedeclinemayhavealsobeenmarketparticipantsclosingpositionsinEUAstomeetelevatedmargincalls,forinstance,forgascontracts44.Figure2:MonthlyspotpricesofemissionallowancesacrossdifferentETS,inEUR/tCO2,datathroughDecember2021.Source:InternationalCarbonActionPartnership(ICAP),Refinitiv,ESMA.Note:USRGGIstandsforthe“USRegionalGreenhouseGasInitiative”comprisingConnecticut,Delaware,Maine,Maryland,Massachusetts,NewHampshire,NewJersey,NewYork,RhodeIsland,Vermont,andVirginia.USRGGI&California/Québec/Ontariobothdisplayquarterlyauctionprices(asopposedtocontinuoustrading).TheChineseETSstartedtradinginJuly2021andtheUKETSstartedtradinginMay2021.162.TherecentpricesurgewasonlytoppedbytheUK’stradingsystemwhich,afteritslaunchinMay2021,movedalongtheEUApriceuntilitspikedbymorethan30%inSeptember2021.DespiteconvergingbacktotheEU’slevel,itsubsequentlyremainedslightlyabove.PossibleexplanationsforthisdivergenceincludetheUK’slowgasstoragecapacityandissuesrelatedtoutilitiesswitchingoverfromtheEUtotheUKallowancesystem45.44WilliamMathis:CarbonTumblesMostinAlmostaDecadeasWarSpooksInvestors,Bloomberg,1March2022.45RobDavies:SurgeinUKwholesalegaspricesfuelswinterenergycrisisfears,TheGuardian,28September2021&CamillaHodgson:Europeangascrunchpushesupcarbonprice,FinancialTimes,4October2021.-10203040506070809010020182019202020212022EuropeanUnionNewZealandUnitedKingdomSouthKoreaChinaCalifornia/Québec/OntarioUSRGGI39Figure3:SpotpricesofEUandUKemissionallowancestradedatICEEndexandICEFuturesEurope,inEUR/tCO2.Sources:Refinitiv,ESMA.4.2.2Forwardcurve163.ThedifferencebetweenEUAspotandfuturespricesissmallandbothhavehistoricallyincreasedintandem,reflectingexpectationsthatpricesareunlikelytocomedownsignificantlyinthelongterm.Figure4:DailypricesofEUAfuturescontractswithDecemberexpirytradedonICEEndex,inEUR/tCO2.Sources:Refinitiv,ESMA.164.ThespreadbetweentheDecember2025andtheDecember2022futureshasremainedpositiveforseveralyears.Thissituationisalsoknownascontango,i.e.theforwardcurve020406080100120May-21Jun-21Jul-21Aug-21Sep-21Oct-21Nov-21Dec-21Jan-22Feb-22UKA(EUR)EUA(EUR)020406080100120Jan-18Jul-18Jan-19Jul-19Jan-20Jul-20Jan-21Jul-21Jan-22Dec22Dec23Dec24Dec2540isupwardsloping.Thespreadremainedrange-boundbetween0and5EURuntilearly2022butreachedamaximumof6.5EURinFebruary2022.Increasesinthecontangobroadlycorrespondtotheupswingphasesinspotpricesin2018andin2021,andthestabilityofthespreadinrelativeterms(i.e.in%ofspotprices)suggeststhatthelatestincreasereflectsthefactthatEUAsaretradingathigherpricelevels.Figure5:AbsolutspreadinEUR/tCO2(leftaxis)and%(rightaxis)betweenDecember2025andDecember2022EUAfuturescontractstradedonICEEndex.Sources:Refinitiv,ESMA.165.Asaresult,theshapeoftheEUAfuturecurveremainedbroadlyflatuntilearly2022withincreasesinspotpricesleadingtoanupwardshiftinthefuturescurvewithoutanymeaningfulsteepening.Themainreasonforthisisthatsurplusallowancescanbekepttocoverfutureneeds,whilethecostof“storing”allowancesissmall,creatingastronglinkbetweenspotandfuturesprices46.46ECB(2021),“EUemissionsallowancepricesinthecontextoftheECB’sclimatechangeactionplan”,ECBEconomicBulletin6/2021.0%2%4%6%8%10%12%14%16%18%01234567Jan-18Jul-18Jan-19Jul-19Jan-20Jul-20Jan-21Jul-21Jan-22Spread(EUR)Spread(%,rhs)41Figure6:ShiftsinthefuturescurveofEUAcontractswithDecemberexpiryonICEEndexbetweenFebruary2020andFebruary2022,inEUR/tCO2.Sources:Refinitiv,ESMA.4.2.3Volatility166.WeusethreemeasuresofvolatilitytoassesspricemovementsofEUAsfrom2018to2022(foradditionaldetailsonthesevolatilitymeasures,seeAnnex1)usingpricedataforthenextDecemberexpirytradedonICEENDEX47.ComparingtheaverageofthosemeasuresbeforeandafterEUApricesstartedtosurgeinMarch2020,asmallincreasecanbeobservedintwooutofthethreemeasures48.MeasureHistoricalvolatilityIntradayvolatilityRSvolatilityMar2018-Feb20200.02230.19930.0240Mar2020-Feb20220.02450.19980.0239Table1:Averageofdailyvolatilitymeasures.HistoricalVolatilityistherolling5-daystandarddeviationofdailyreturns.IntradayvolatilityfollowstheParkinsonmethodandRSvolatilityreferstotheRogers-Satchellmethod.Foradescriptionofthosemeasures,seeAnnex1.Sources:Refinitiv,ESMA.47InthepreliminaryreportthevolatilityanalysisfocusedontheDecember2021expiry.Byswitchingtoameasurethatreferstothefront-year(December)contract,dataavailabilityhasimproved.ThisresultedinhigherestimatesfortheMarch2018-February2020periodandthereforeinsmallerdifferenceswiththeMarch2020-February2022period.48ThemarketturmoilrelatedtotheRussia-UkraineconflictatthebeginningofMarch2022hasnotbeenincludedtoillustratepricevolatilityunder‘regular’marketconditions.020406080100120Dec22Dec23Dec24Dec25Dec26Feb20Feb21Aug21Feb2242167.Figure7showsthehistoricalvolatility,calculatedasrolling5-daystandarddeviationofdailypricereturns.AsidefromsomeextremevaluesinSeptember2018,March2020,December2021,andMarch2022,wecannotidentifyanystructuralbreaksoraclearupwardtrend.Figure7:HistoricalvolatilityoffrontyearDecemberfutures,dailyclosingpricesatICEEndex,Rolling5-daystandarddeviationofdailypricereturns,in%.Source:Refinitiv,ESMA.168.Toconfirmthisfinding,wecalculateanadditionalmeasureofintradayvolatility49whichcouldbeconsideredmoreprecisethandailyreturnvolatility,sinceitalsoaccountsforwithin-dayinformationofhighandlowprices50.Basedonthismeasure,noclearstructuralbreakcanbeidentifiedeither.TheincreaseinintradayvolatilityrelatedtotheconflictbetweenRussiaandUkrainehasbeenparticularlypronounced,highlightingtheparticularlylargepricemovementsoveraveryshortperiodoftime.49Parkinson,M.(1980),“TheExtremeValueMethodforEstimatingtheVarianceoftheRateofReturn”,TheJournalofBusiness,No.53,pp.61-65.50Petnehazi,G.andGall,J.(2019),“ExploringthePredictabilityofRange-BasedVolatilityEstimatorsusingRNNs”,IntelligentSystemsinAccounting,Financeandmanagement,Vol.26,pp.109-116.0%2%4%6%8%10%12%Jan-18Jul-18Jan-19Jul-19Jan-20Jul-20Jan-21Jul-21Jan-225dRollingStd90dMA43Figure8:IntradayvolatilityoffrontyearDecemberfutures,dailyhighandlowpricesatICEEndex,Parkinsonmethod.Source:Refinitiv,ESMA.169.Last,andasarobustnesscheck,wecomputeanothermetricofintradayvolatilityfollowingRogersandSatchell51whoproposeamethodthatisrobusttoapossiblenon-stationarityoftheunderlyingtimeseries.Themeasureconfirmsthepreviousobservations.Figure9:IntradayvolatilityoffrontyearDecemberfutures,dailyhigh,low,openingandclosingpricesatICEEndex,Roger-Satchellmethod.Source:Refinitiv,ESMA.51Rogers,L.G.C.,andSatchell,S.E.(1991),“EstimatingVariancefromHigh,LowandClosingPrices”,Theannalsofappliedprobability,Vol.1,No4,pp.504-512.-1.002.003.004.005.006.007.00Jan-18Jul-18Jan-19Jul-19Jan-20Jul-20Jan-21Jul-21Jan-22ParkinsonVolatility90dMA-0.050.100.150.200.25Jan-18Jul-18Jan-19Jul-19Jan-20Jul-20Jan-21Jul-21Jan-22Roger-SatchellVolatiliy90dMA444.2.4Comparisonwithotherassets170.ThehistoricalvolatilityofEUApricessinceJanuary2019(computedusingstandarddeviationofdailyreturns)was2.9%,comparedwith1.2%forequitiesandlessthan0.3%forbonds(Table2).ThisfirmlyputsEUAsinthe‘riskassets’categoryfromaportfolioinvestmentperspective.However,asafinancialasset,EUAshavemoreincommonwithenergycommoditiesthanothertraditionalassetclasses.EUAsEquitiesCorporatebondsGovernmentbondsCrudeoilNaturalgasCoal2.9%1.2%0.2%0.3%4.3%5.1%2.7%Table2:StandarddeviationofdailyreturnsinEUemissionallowances(EEX-EUAContinuoustrading),equities(STOXXEurope600index),corporatebonds(ICEBofAEuroCorporateindex),sovereignbonds(ICEBofAEuroSovereignindex),crudeoil(Brent1-monthprice),naturalgas(NYMEXDutchTTFNaturalGasCalendarMonth),andcoal(ICECoalRotterdamContinuoustrading),from1January2019to31December2021.Sources:Refinitiv,ESMA.171.ThepriceincreasethatEUAshaveexperiencedfromtheMarch2020throughtotheendof2021(+423%)isclosertothatofcrudeoil(+207%)ornaturalgas(+670%)–althoughthepricerecoverystartedlaterforenergycommodities.Similarly,thepricedeclinefrompeaktotroughexperiencedinMarch2020wassteeperforEUAs(-35%)thanequities(-26%)orcorporatebonds(-8%)butnotassevereascrudeoil(-50%).NaturalgasandcoalpriceswerelittleaffectedbytheMarch2020lockdownmeasures.SincethemiddleofMarch2020,dailychangesinEUemissionallowancepricesdisplayedapositivecorrelationcoefficientof38%withequitiesand23%withcoal(thecorrelationwithotherassetswasbelow20%).Figure10:PricesofEUemissionallowances(EEX-EUAContinuoustrading),equities(STOXXEurope600index),corporatebonds(ICEBofAEuroCorporateindex),sovereignbonds(ICEBofAEuroSovereignindex),crudeoil(Brent1-monthfutureprice),naturalgas(NYMEXDutchTTFNaturalGasCalendarMonth),coal(ICECoalRotterdamContinuoustrading),gold(S&PGSCIGoldSpot),rebasedwith1January2019=100.USDpricesconvertedtoEUR.Source:Refinitiv,ESMA.050100150200250300350400450Jan-19Jul-19Jan-20Jul-20Jan-21Jul-21Jan-22EquitiesCorporatebondsGovernmentbondsEUA0100200300400500600700800Jan-19Jul-19Jan-20Jul-20Jan-21Jul-21Jan-22OilNaturalgasCoalEUA45172.Formanyassets,sharpincreasesinspotpricesusuallyresultinbackwardation(i.e.aninversionofthefuturecurvecorrespondingtospotpricesbeinghigherthanfutureprices).Thisreflectsexpectationsthatfuturepriceswillreverttotheirlong-termmeanorsimplydecrease,withtheslopeofthecurvesignallinghowquicklythisisexpectedtooccur.Backwardationcanbeobservedforenergycommodityprices,withforexampletheinversionofthecrudeoilfuturecurveinDecember2020andsubsequentsteepening,incontrastwiththeEUAfuturecurvewherenobackwardationcanbeobserved.Inotherwords,anupwardslopingEUAfuturescurveimpliesnomarketexpectationsaboutEUApricesrevertingtotheirlong-termmean.Figure11:FuturecurveofDecembercontracts,Brentcrudeoil(USD/barrel)andEUemissionallowances(EUR/tCO2),inFebruary2020andFebruary2022.Source:Refinitiv,ESMA.4.2.5Carbonmarketsupplyanddemanddynamics173.OneofthefundamentaldriversbehindcarbonpricedevelopmentshasbeenthechangeinsupplyanddemandofEUAsovertime.AsexplainedinSection2,newEUAsenterthemarketeveryyeareitherintheformoffreeallocationstofirmsunderEUETScomplianceorthroughtheauctionprocess.FirmsunderEUETScomplianceobligationsmustsurrendereveryyearagivenamountofemissionallowancesbasedonthe(verified)greenhousegasemissionstheyemittedduringtheprecedingyear52.TheexcesssupplyofEUAsformanyyearsrelativetotheverifiedemissionsofEUETScompliancefirms–resultinginapeakcumulativesurplusof2billionallowancesin2013–hasbeenthemainreasonbehindlowcarbonpricesuntil2018.52ThedetailsoftheinformationtobereportedandtherequirementsregardingverificationbyaccreditedverifiersaresetoutinEUMonitoringandReportingRegulation((EU)2018/2066)andEUAccreditationandVerificationRegulation((EU)2018/2067).020406080100120T+1T+2T+3T+4T+5EUAFeb20EUAFeb22CrudeoilFeb20CrudeoilFeb2246Figure12:SupplyofEUemissionallowances(includingallowancesallocatedforfree,auctionedorsoldplusinternationalcreditssurrenderedorexchanged)andverifiedgreenhousegasemissionsofEUETScompliancefirms,inmilliontonnesofCO2-equivalentemissions.Cumulativesurplus=cumulativesupplyofallowancesminuscumulativeemissions.Source:EuropeanEnvironmentAgency.174.TheestablishmentoftheMarketStabilityReserve53(MSR)helpedtoaddresstheexcesssupplyissue,creatingexpectationsofatightermarket.54TheMSRadjustsauctionvolumesaccordingtopredefinedthresholdsofthetotalnumberofallowancesincirculation(TNAC).Inanygivenyear,whentheTNACisabove833million,12%(andupto24%until2023)ofthesurplusiswithheldfromauctions;whenitisbelow400million,100millionallowancesaretakenfromtheMSRandaddedtoauctionvolumesthefollowingyear.ThesethresholdsbeingpricedinbyEUAmarketparticipantsactasapricestabilisationmechanism.FollowingMSRinterventionsfrom2019,thesurplusofallowancesdecreasedfrom1.655billionin2018to1.385billionallowancesin2019andlimitedtheincreaseduetolowerdemandin2020(fromreducedeconomicactivityandenergydemand),to1.579billion.Theauctionvolumesin2021furtherdecreasedbynearly40%asaresult,i.e.around320million.5553Decision(EU)2015/1814oftheEuropeanParliamentandoftheCouncilof6October2015concerningtheestablishmentandoperationofamarketstabilityreservefortheUniongreenhousegasemissiontradingschemeandamendingDirective2003/87/EC(OJL264,9.10.2015,p.1-5).54EuropeanFederationofenergytraders,“EUETSpricedevelopments”(2021)55EuropeanCommission,ReportonthefunctioningoftheEuropeancarbonmarket(2021)-3,000-2,000-1,00001,0002,0003,0004,0002005200620072008200920102011201220132014201520162017201820192020CumulativesurplusSupplyofallowancesVerifiedemissions47Figure13:BreakdownofsupplyanddemandofEUemissionallowancesfrom2017to2022,cumulativesince2013(beginningofPhase3).'OtherEUAs'includeallowancesbankedfromPhase2(2008-2012)andsupplyotherthanfromfreeallowancesorauctions.MSR=MarketStabilityReserve.TNAC=Totalnumberofallowancesincirculation.Source:EuropeanCommission.175.TheannouncementofmorestringentclimatepolicytargetsinDecember2020furtherdroveexpectationsoftighterEUAsupply.Indeed,between2013and2020(i.e.Phase3oftheEUETS),thenumberofnewEUAsenteringthemarketdecreasedeveryyearbyalinearfactorof1.74%.Thisreductionfactorincreasedto2.2%fortheperiod2021-2030(i.e.Phase4).InthewakeofthenewEUobjectivestoreducenetGHGemissionsbyatleast55%by2030comparedto1990levels,thedecreaserateisnowforeseentoriseto4.2%peryear56.4.2.6Buyandholdstrategies176.OneofthekeydevelopmentsonthedemandsideinrecentyearsistheentryofagrowingnumberoffinancialentitieswithlimiteddirectconnectiontotheregularfunctioningoftheEUETSmarket.Asevidencedintheliterature(seeSection4.1),thesemayincludemarketparticipantswithshort-termtradingstrategies,aswellaslonger-terminvestorswithbuy-and-holdstrategies,seekingeitherexposuretocarbonmarketsorwaystohedgetheirclimatetransitionriskexposure.177.Anoteworthytrendhasbeenthegrowthofexchange-tradedproducts(ETPs)aimingtoreplicateortrackcarbonprices,suchasexchange-tradedfunds(ETFs),exchange-tradedcommodities(ETCs),andexchange-tradednotes(ETNs).57AsofthefirstweekofMarch2022,thereweresixETPsinvestingincarbonmarkets,fourofwhichwere56ThefullproposalswereoutlinedintheFit-for-55packageproposedbytheEuropeanCommissioninJuly2021,see:https://ec.europa.eu/commission/presscorner/detail/en/IP_21_354157ForanexplanationbetweenthedifferenttypesofETPs,seeEFAMA(2020),DemystifyingETPs:AsimpleguidefortheEuropeaninvestor:https://www.efama.org/sites/default/files/publications/20%2011%20EFAMA%20ETP%20Investor%20education%20guide_0.pdf1,6551,6551,3851,579-20,000-15,000-10,000-5,000-5,00010,00015,00020,0002017201820192020FreeEUAsAuctionedEUAsOtherEUAsMSRVerifiedemissionsTNAC48launchedduringthesecondhalfof2021.ThecombinedassetsoftheseETPsreachedapeakof2,433millioninFebruary2022,upfromEUR500millionsixmonthsearlierandEUR210millionattheendof2020.FollowingthemarketturmoilinFebruaryandMarch2022,totalassetsdeclinedby30%,toEUR1,693million.Figure14:Assetsofexchange-tradedproductsfocusingoncarbonmarkets,EURbn.‘Mar-22’observationasof7March.Source:Morningstar.178.OutofthesesixETPs,fiveinvestinEUemissionallowances(thelastoneinvestsexclusivelyintheCalifornianallowancemarket)–eitherbecausetheydirectlystatedthisintheirinvestmentpolicy58,orforpracticalreasonssuchasthesize,accessibilityandliquidityoftheEUcarbonmarketcomparedtomarketsinotherjurisdictions.Importantly,fouroutofthefiveETPsinvestinginEUAsrelyonsyntheticreplication,i.e.theyaimtoreplicatecarbonpricesbyinvestingexclusivelyinderivatives.179.ThelaunchoftheSparkChangePhysicalCarbonEUAETC(‘SparkChange’)ontheLondonStockExchangeinNovember2021markedthefirstlaunchofanexchange-tradedproductorvehicleinvestinginphysicalEUAs.SparkChangeisadebtinstrumentwithinthescopeofArticle4(1)(44)(b)ofMiFIDII.ByissuingaseriesofsecureddebtsecuritiesthatarelinkedtophysicalEUAs,HANETCSecuritiesplc(the“Manufacturer”)seekstoenableinvestorstogainexposuretoEUAs.TheManufacturerholdsanoteissuedbytheBackingIssuer(SparkChangeJerseyIssuerLimited,incorporatedunderthelawsofJersey)andtheBackingIssuerholdstheEUAsinaUnionRegistryaccount.TheManufacturerthenissuessecuredzerocoupondebtobligations.180.AccordingtoitsKID59,SparkChangeisrelativelyrisky(riskindicatorratedat6outof7)andtherefore,itisintendedforinvestorswiththeabilitytobearlossesuptothetotalamountinvested.TheProspectusfurtherspecifiesthatonly“experiencedfinancial58Forexample,theKraneShareswebsitestatesthat“TheKraneSharesEuropeanCarbonAllowanceStrategyETFprovidestargetedexposuretotheEuropeanUnionAllowances(EUA)cap-and-tradecarbonallowanceprogram.”59Seehttps://sparkchange.io/wp-content/uploads/2021/11/kid_co2_XS2353177293_en_GB.pdf0.00.51.01.52.02.5Jun-20Sep-20Dec-20Mar-21Jun-21Sep-21Dec-21Mar-22WisdomTreeCarbonETCiPath®SeriesBCarbonETNKraneSharesEuropeanCarbAllwStgyETFKraneSharesCaliforniaCarbonAllwETFKraneSharesGlobalCarbonETFSparkChangePhysicalCarbonEUAETC49institutions”mayenteranagreementwiththeManufacturer,beforetheycanmaketheETCavailabletoendinvestorsthroughexchangesortheOTCmarket.181.Despitethesewarnings,SparkChangeoffersinpracticethepossibilityformanynewinvestorstoinvestinphysicalEUAs,potentiallybroadeningparticipationtoasignificantlylargernumberofinvestors.Indeed,SparkChangeclaimsonitswebsite60tomake“physicalcarboneasilyinvestable;untilnowinvestinginphysicalcarbonhasbeentoooperationallychallengingtomanyinvestors”.Althoughthevolumesexchangedhaveremainedlimitedsofar,dailytradingandcontinuousassetgrowthsinceinceptionshowtheappealofthisETCtosomeinvestors.Figure15:SharepriceinEUR(leftaxis)anddailyvolumesexchangedofSparkChangePhysicalEUAETConLSE(rightaxis).Source:RefinitivEIKON.182.SparkChangeclaimstohavea“directandpositiveenvironmentalimpact”bytakingEUAsawayfrompollutingfirmsandreducingtheavailablesupply,leadingpricestoincrease.WhiletheactualimpactoftheinstrumentonEUApricesandonemissionsreductionbycomplianceentitiesisunclear,theproductindeedtakesEUAsawayfromthenumberofallowancesavailablefortradingasitssizeincreases.Theoverallimpactappearstobelimitedsofar:sincetheETCwaslaunchedon5November,theassetsofSparkChangehaveincreasedfromniltoapeakofEUR245millionasof23February2022,equivalenttoaround2.5millionEUAsbasedoncurrentEUAspotprices(or0.2%of2020TNAC).InthecontextofthemarketturmoilinlateFebruaryandearlyMarch2022,SparkChangeassetssubsequentlydeclinedtoEUR146millionasof7March.183.Moreover,purchasesofphysicalEUAsbySparkChangehavebeenspreadovertimesincetheymirrordailyin-andout-flowsfromtheinstrument.Theaveragesingle-dayincreaseinSparkChangeassets,aproxyforthedailyvolumesofphysicalEUAsitbuysonthemarket,amountedtolessthanEUR15millionsincetheinstrumentwaslaunched.BasedontheanalysisofMiFIDtransactionreports(seeSection4.3.5),theaveragedailytradingvolumesofcontractswithexpiryofupto2days(includingspottransactions)60Seehttps://sparkchange.io/etc-institutional-investors/010,00020,00030,00040,00050,00060,00070,00050556065707580859095100Nov-21Dec-21Jan-22Feb-22Mar-22PriceVolumes(rhs)50amountedtoEUR818millionbetweenJuneandDecember2021,implyingthatEUApurchasesbySparkChangeaccountedforlessthan0.2%ofvolumestradedonaveragebetweenearlyNovemberandmid-February61.184.Nonetheless,thepotentialscopeforgrowthaswellasthelaunchofnewinvestmentvehiclesorinstrumentsinthefuturewarrantsmonitoring.Thisisparticularlythecaseinacontextwhereinvestorspayincreasingattentiontoclimate-relatedpoliciesandrisks,includingtheroleofcarbonmarketsinfacilitatingthetransitiontoalow-carboneconomy.4.3EvolutionoftradingandcounterpartiesinEUcarbonmarkets4.3.1Overviewoftheavailabledatasets185.Forthefinalreport,ESMAhassoughttoexpandthedatasourcesusedasabasisforitsassessmentofthecarbonmarket,incontrasttothepreliminaryreportwhichexclusivelyreliedonpubliclyavailableweeklypositionreports.186.Thedatasetscovergranularinformationbothontheprimaryandsecondarymarkets;bothatpositionandtransactionlevelandthedatasetsaredisaggregatedatinstrumentlevelandcounterpartylevel(exceptfortheweeklyreports).187.Duetotheexistinglegalframework,eachdatasethasaspecificscopeintermsofcounterpartiesandinstrumentscovered,meaningthatnodatasetcanprovidethefullpictureofthecarbonmarketonastandalonebasis.Inaddition,thedepartureoftheUKfromtheEuropeanUnionisaffectingeachdatasetinadifferentway,insomecasesleadingtoaninterruptionofreportingfrom1January2021(e.g.EMIR)andinothercasestotheunavailabilityofdatabefore1January2021(e.g.transactionreports,dailypositionreports).188.ThecharacteristicsandchallengesofeachdatasetisprovidedinTable3below.61Thisestimateexcludestradinginderivativescontractswithexpirygreaterthantwodays,includingtradinginthemostliquidfuturescontract(suchasthenextDecemberexpiry)wheremostofthevolumesareconcentrated.51#DatasetnameLegalreferencePrimarymarket(PM)Secondarymarket(SM)Post-Trade(PT)Transactions(TS)orPositions(PO)OrTransfer(TF)EntitiesinscopeInstrumentsinscopeTimehorizonSource1AuctionreportsArticle36(5)AuctioningRegulationPMTSAnyentityparticipatingintheauctionEUAJun/20toDec/21BaFin2EMIRtraderepositoriesreportsArticle9EMIRSMTSOnlyEUentitiesaresubjecttoEMIRreportingobligationEUAderivativestradedonexchangeandOTCJan/20toDec/21ESMAaccesstoEMIRtraderepositories3TransactionreportsArticle26MiFIRSMTSEUAsandEUAderivativestradedonexchangeJun/2062toDec/21BaFinFin-NOAFM4WeeklypositionreportsArticle58(1)(a)MiFIDIISMPOEntitiesholdingapositiononEUAderivativesEUAderivativesJan/18toDec/21Public5DailypositionreportsArticle58(1)(b)MiFIDIISMPOEntitiesholdingapositiononEUAderivativesEUAderivativesJun/2063toDec/21BaFinFin-NOAFM6UnionregistrydataPTTFandPOEntitiesholdingapositiononEUAEUAEuropeanCommissionTable3:Datasourcesusedforthefinalreport62Jun/20toDec/21forEEXandNasdaqNO.ForICEEndex,transactionreportsareavailablefromthedateonwhichthetradingofderivativesonEUAsmigratedfromtheUKtotheNLplatform,i.e.fromJun/21.63Jun/20toDec/21forEEXandNasdaqNO.ForICEEndex,transactionreportsareavailablefromthedateonwhichthetradingofderivativesonEUAsmigratedfromtheUKtotheNLplatform,i.e.fromJun/21.524.3.2Classificationofcounterpartiesusedinthisreport4.3.2.1Commonclassificationofcounterparties189.Whilepreparingthepreliminaryreport,ESMAhadbeenmadeawareofpossibledifficultiesandinconsistenciesintheclassificationofcounterpartiesintheweeklypositionreportsandintendedtofollow-uponthisissueinthefinalreport.190.Forthispurpose,ESMAhascompiledinasinglelistthecounterpartiespresentinanyofthe6differentdatasetsintroducedintheprevioussectionandcheckedwhetherthecounterpartieswereclassifiedinthesamewayindifferentdatasources.191.Thedatasourcesusedtobuildthecommonclassificationare:•theclassificationofcounterpartiesusedbytradingvenues(EEXandICEEndex)toproducetheweeklypositionreports;•theclassificationofcounterpartiesreportedinEMIRTRdata64;•thepublicregistersoffinancialcounterparties(ESMAregister65,EBAregister,FCAregister66);•thepubliclistofoperatorsintheEUETSpublishedbytheEuropeanCommission67•Externalsourcesofdata(GLEIFandcommercialdatabases).192.Thepurposeofthisexercisewas(1)toidentifycasesofinconsistentclassificationsbetweendifferentsourcesandwherepossiblethereasonsforthoseinconsistencies,andtoproposeremedialactions;(2)toestablishacommonclassificationofcounterpartiestoensurethattheanalysespresentedinthisreportareperformedonthebasisofacommonclassification.193.Thecommonclassificationusesthesamefivecategoriesastheonesoftheweeklypositionreportsi.e.(1)investmentfirmsorcreditinstitutions;(2)investmentfunds;(3)otherfinancialinstitutions;(4)operatorswithcomplianceobligationsundertheETSDirective(thereafter“complianceentities”);and(5)commercialundertakings,i.e.non-financialcounterpartiesotherthanthosewithcomplianceobligationsundertheETSDirective(thereafter“othernon-financials”).194.Crossingthevarioussourcesofinformationproducedcaseswhereallclassificationswereconsistent(thereafter“consistentclassifications”),caseswheresomeclassificationswereinconsistent(“inconsistentclassifications”),andcasesoflegal64Field6“Corporatesectorofthereportingcounterparty”andField7“Natureofthereportingcounterparty”65ESMAregisteroffinancialentitiesavailableat:https://registers.esma.europa.eu/publication/searchRegister?core=esma_registers_upreg66ListofUKinvestmentfirmsavailableat:https://register.fca.org.uk/s/resources#Downloads67AvailableunderMiscellaneoussectionat:https://ec.europa.eu/clima/eu-action/eu-emissions-trading-system-eu-ets/union-registry_fr53entitieswhichwereonlyclassifiedinonedataset(“singleclassification”).Inaddition,somelegalentitiescouldnotbeclassified(“unclassified”)becausetheywereidentifiedonlyindatasetswhichdonotincludeanyclassification(i.e.transactionsreports).195.Inthecaseofinconsistentclassifications,counterpartieswerecross-checkedindividuallyagainstotherpublicsourcesofinformationtoidentifythemostappropriateclassification.Forfinancialcounterparties,ESMAreliedtotheextentpossibleontheclassificationsprovidedinthepublicregisters.196.Asregardstheclassificationofthird-countryentitiesintheweeklypositionreports,andinparticularthird-countryfunds(seemoredetailsinSection198),ESMAhassoughttoidentifyentitieswhichcouldreasonablybeclassifiedasinvestmentfundsonthebasisofamatchingterminologyderivedfromthenamesoflegalentitiesconsistentlyclassifiedunderEUlawasinvestmentfunds.197.ThepubliclistofoperatorspublishedbytheEuropeanCommissionhasalsobeenusedasaclassificationsourceasfollows:thislistisasubsetofUnionRegistryaccountswhichonlyincludessocalled“operatorholdingaccounts”.ThosetypesofaccountsaretiedtoinstallationswithcomplianceobligationundertheEUETSDirective.Whilethesameaccountholdermayholdbothan“operatorholdingaccount”anda“tradingaccount”(linkedtoitsfinancialactivitiesintheEUETSmarket),thevastmajorityoflegalentitiesidentifiedinthelistofoperatorsarecomplianceentities68.198.Asaresult,legalentitieswhichwereclassifiedas"Othernon-financials"forthepurposeoftheweeklypositionreports,andwhicharepresentinthelistofoperators,havebeenreclassifiedascomplianceentitiesinthecommonclassification.Inaddition,legalentitieswhicharepresentinthelistofoperatorsandabsentfromanyotherclassificationsourcehavebeenclassifiedascomplianceentitiesinthecommonclassification.IssueswiththeclassificationintheMiFIDIIweeklypositionreports199.Whencomparingthecommonclassificationwiththeclassificationintheweeklyreports,ESMAidentifiedtwomainissues,onerelatedtoinvestmentfundsandonerelatedtonon-financialcounterparties.First,severalfundsappeartobeclassifiedintheweeklypositionreportsunderthecategory“othernon-financials”or“investmentfirmsandcreditinstitution”(ortoalesserextent,underthecategory“otherfinancials”).Thisissueismoreprominentinthecaseofthird-countryentities.Ifthoseentitieswereclassifiedasfunds,thenumberoffundsintheweeklypositionreportswouldberoughly10%higher69.200.Second,severalentitiesappeartobeclassifiedintheweeklypositionreportsunderthecategory“othernon-financials”whentheyinsteadshouldbeclassifiedas“complianceentities”.ThisissuedoesnotseemtobelinkedtotheUKdeparturefromtheEUasalmostallcomplianceentitiespresumablymisclassifiedasnon-financialentitiesareEU68AfewfinancialentitiesholdanoperatingholderaccountbutmostoftheirEUAtradingactivityliesinthetradingaccount.Thosecounterpartieshavenotbeenreclassifiedascomplianceentities.69I.e.ifthenumberoffundsintheweeklyreportswas100,thenumberoffundsafterreclassificationwouldbearound110.Thenumberofpositionholdersineachcategoryafterreclassificationcanbeviewedintheanalysisbasedondailypositionreports(Section4.3.7).54ones,excludingtheUK.Thenumberofcomplianceentitiesintheweeklypositionreportscouldbeunderestimatedbyafactorof3to4.201.ProposalstoimprovethecounterpartyclassificationintheMiFIDIIweeklypositionreportsarepresentedinSection5.3.4.3.3AnalysisbasedonAuctiondata202.IssuesrelatedtotheclassificationofcounterpartieswerediscussedinSection4.3.2above.Inlightofthedifficultytoaccuratelyassigncounterpartiesunderthecategories“complianceentities”and“othernon-financials”,bothcategorieshavebeenmergedintheanalysisbelow,undertheuniquelabel“Non-financials”.203.ThedatareceivedbyESMAundertheAuctioningRegulationextendsfromJune2020untilDecember2021.ThetotalquantityofEUAsauctionedoverthistimeframewasjustunderonebillionforatotalmarketvalueofEUR41.8billion(aroundEUR120millionperday),includingEUR31bnin2021only.Incomparison,thetotalquantityofEUaviationallowances(EUAAs)auctionedamountedtojust7million,or0.7%ofthetotal.204.ThenumberofuniqueparticipantsinEUAauctionsheldbetweenJanuary2021andDecember2021was48.Thedailynumberofparticipantswassmaller,with18auctionparticipantsonaverage.Thisnumberdeclinedslightlyoverthecourseof2021butwasbroadlyonparwiththesecondhalfof2020.Figure16:DailynumberofparticipantsinEUAauctionsheldatEEX,and20-daymovingaverage.Sources:BaFin,ESMA.205.ThesmallnumberofentitiesparticipatingtoEUAauctions,relativetothenumberofparticipantsinsecondarymarkets(between400and700activeparticipantsmonthlyin2H21,seesection4.3.4.3and4.3.5.3)suggestspossiblebarrierstoentry.Thesemaystem,forexample,fromthecostsofparticipatinginauctionsasopposedtorelyingexclusivelyonservicesprovidedbyinvestmentfirmsinsecondarymarkets(seeSection2foranoverallexplanation).051015202530Jun-20Aug-20Oct-20Dec-20Mar-21May-21Jul-21Sep-21Nov-2155206.Participantsin2021EUAauctionsincluded34non-financials(including3UKentitiesand3Swissentities)and14financials(including3UKentitiesandtwofromotherthirdcountries).Altogether,third-countryentitiesbought15%oftheEUAvolumesauctionedin2021.MorethantwothirdsofauctionedEUAswereboughtbynon-financialentities(69%in2021),withthisproportionholdingrelativelysteadyovertime.Figure17:MonthlyshareofEUAvolumesauctionedbyEEXbysector.70Sources:BaFin,ESMA.207.Themarketappearstobefairlyconcentratedinthehandsofafewentities.Thetop10auctionparticipantsaccountedfor90%ofthevolumesauctionedin2021,withtheremaining38participantsaccountingforjust10%.Thetopthreeauctionparticipantswerenon-financialsandboughtacombined49%of2021EUAvolumes.Incontrast,thetopfourfinancialsin2021auctionvolumesbought28%.Figure18:ShareofEUAvolumesauctionedin2021,top10participantsvs.rest.Sources:BaFin,ESMA.70TheJanuary2021numberspresentedinthegraphonlyincludeonedayofauctiontrading(29January2021)correspondingtolowmonthlyvolumesandalimitednumberofparticipants.EEXdidnotholdauctionsformostofJanuary2021.0%10%20%30%40%50%60%70%80%90%100%Jun-20Aug-20Oct-20Dec-20Feb-21Apr-21Jun-21Aug-21Oct-21Dec-21Non-financialsFinancials0%10%20%30%40%50%60%70%80%90%100%12345678910Rest56208.Dailyconcentrationmeasuresprovideamixedpictureofdevelopmentsovertime.Thebid-to-coverratio(or“coverageratio”,calculatedastheaggregatevalueofallbidsreceivedinagivenauctionoverthetotalvaluesold)hasremainedstablebetweenJune2020andDecember2021ataround1.771.Ontheotherhand,theHerfindahl-Hirschmanindex(calculatedbysummingthesquaresoftheindividualmarketsharesbyparticipantbasedondailyquantities)showsconcentrationincreasing,from0.17inQ42020to0.23inQ42021.Figure19:CoverageratioandHerfindahl-HirschmanindexbasedondailyvolumesofEUAsauctionedatEEX.Thedottedlinesshow20-daymovingaverages.Sources:BaFin,ESMA.209.Cross-checkingthisinformationwithdataondailyderivativepositions(Section4.3.7),thetop10auctionparticipantsalsoappeartobesignificantplayersinsecondarymarkets.Thetop3EUAderivativespositionholders(basedonaggregatepositionsize)areindeedamongstthetop10auctionparticipants,andthesetop10auctionparticipantstogetheraccountedfor26%ofallEUAderivativespositionsreportedduringthesecondhalfof2021.DatafromtheEUTransactionLog(Section4.3.8)confirmthattheseauctionparticipantsarelargenetsuppliersofphysicalEUAs,especiallytocomplianceentities(allowingthesetofulfiltheirobligations),butalsotonon-complianceones(contributingtosecondarymarketliquidity).Thesefindingsshowthatdespitesomeconcentrationinprimaryauctions,themainauctionparticipantshelpdisseminateEUAstoothersecondarymarketparticipants.4.3.4AnalysisbasedonEMIRdata4.3.4.1OverviewonEMIRdataandprocessing210.Forthefollowingsubsections,ESMAexploiteddatareportedunderArticle9ofEMIRwhichessentiallyrequiresallEEAcounterpartiesconductingderivativetransactionstoreporttheirtransactionstoTradeRepositories(TRs)72.Thisobligationnotonlyincludes71Thecoverageratioisnaturallygreaterthanone,asundersubscribedauctionswouldbecancelledautomatically.72https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32012R06480.00.10.20.30.40.50.60.70.80.00.51.01.52.02.53.03.54.0Jun-20Jul-20Sep-20Nov-20Feb-21Mar-21May-21Jun-21Aug-21Sep-21Nov-21CoverageratioHHI57conclusionsofbothOTCandETDtransactionsbutalsoposttradeactivitysuchasclearingorcompressionaswellasintragrouptransactions73.ThisuniquecombinationofdifferentviewsonthishighlysophisticatedandveryheterogenousderivativesmarketmakesEMIRdataauniquesourceofinformationforthisreport.211.EMIRdataisprovidedthroughseveralaggregatedreportstoauthorities,themainonesbeingtradeactivity,tradestateandpositionreports.Whiletradestatereports(TSR)offeradetailedviewonallderivativesoutstandingatacertaindate,tradeactivityreports(TAR)entailahighergranularitybyprovidingthelifecycleeventssuchas,forexample,opening,valuationandcancellingofderivatives.Inthisreportasthemaingoaloftheanalysisistoinvestigatetherecentdevelopmentsoftheemissionallowancesderivativessegment,naturallythepresentedresultswillbemainlybasedonTARdata.212.ThefinaldatasampleincludedintheanalysiscomprisestheperiodbetweenJanuary2020andDecember2021,with569observedtradingdays.SinceJanuary1st,2021,counterpartieslocatedintheUKdonothavetheobligationtoreportunderEMIRanymore,whichisvisibleinsomeofthefiguresbelow.However,tokeeptheanalysisascompleteaspossiblethereportsfromthesecounterpartiesareincludedthroughout2020.Further,thedatahasbeenfilteredtocontainEUAderivativesbyusingthecommodityfieldsinEMIR.Forthecross-commodityanalysisthesamplehasbeenextendedtootherrelatedderivatives(i.e.withoil,gasandcoal)usingthesameidentificationmethod.213.DatacleaningwasconductedusingsimilarmethodsoutlinedintheESMAAnnualStatisticalReportonEUDerivativesMarkets74.Thefollowingexplanationsgiveaquickoverviewofthestepsthathadbeentaken.Firstly,reportswereidentifiedthathavebeenreportedmultipletimes.Ofthesereportsonlyonereportwaskeptfortherestoftheanalysis.Thisstepdoesnotentailadjustmentsfordoublereporting,whichareoutlinedbelow.Secondly,outlierswereidentifiedusingamedianandstandarddeviationapproach.AswiththecommonapproachbeingtakenonoutlierswithEMIRdatatheseareremovedastheinformationofotherfieldsneedstobeputintoquestion.Thirdly,datathatexhibitedawrongexecutiontimestamp,eitherwronglyreportedorimplausible,wereremoved.Thesearerecordsthathaveanexecutiontimestampthatisinthefutureorinthepast,i.e.timestampsthatareimplausiblegiventhereferencedateofthereport75.Recordswiththemissingvaluesinthefieldmaturitydatewereincludedinthesample.214.SincetheposttradeactivitysuchasclearingorcompressionisincludedintheTARreports,furtheradjustmentsneedtobeappliedinordertoaggregateonlytheend-clientactivity.Withregardstoclearing,reportsrelatingpurelytothepost-tradeactivityhavebeenremoved.InthecaseofOTCderivatives,thishasbeenachievedbyconsideringonlythebilateralderivativesbetweentheoriginalcounterpartiesandexcludingthesubsequentreportswithclearingmembersandbetweenclearingmembersandCCPs.InthecaseofETDsamorecomplexprocedurewasappliedduetothefactthatoriginal73TotheextenttheyarenotsubjecttotheexemptionformreportingofintragroupderivativespursuanttotheArticle9(1)ofEMIR74https://www.esma.europa.eu/press-news/esma-news/esma-reports-derivatives-and-securities-markets-in-202075Dateasofwhichthereportisproduced58executiononvenueisnotreportedunderEMIR76.Notably,allthetradesbetweenclearingmembersandCCPshavebeenremoved77toavoidcountingmultipletimeswhatisessentiallythesametrade.Afterthisstep,thedataanalysedmightstillcontainthesametradereportedtwice:ifboththeclientandtheclearingmemberarelocatedintheEEA30,bothofthemhavetheobligationtoreporttoEMIR.ESMAconsideredalsothetradesreportedonlybytheclearingmember(wheretheclearingmemberisbasedintheEEA30andthefinalclientoutsideoftheEEA30).Afterdechainingthisdoublereporting,wearriveatthefinal‘clientreports’mentionedinthefollowingparagraphsandfigures.Theseinclude,wheneverpossible,thehighestqualityreportoftheclient-clearingmembertrade,and-forOTCderivatives-theoriginalunclearedreport.However,inallcasesitisthefinalclient,ratherthanaclearingmember,consideredforthepurposeofpresentingthemarketstructure.Finally,whenthefinalclientsonboththebuyingandsellingsidesofanexecutionareobserved,thecorrespondingamountsareaggregated.215.EMIRcontainstwolevelsofthesectorclassificationofcounterparties:aninitialclassificationbetweenfinancialandnon-financialcounterpartiesandasecondlevelwithamoregranularbreakdownofthecorporatesectors.Thesetwofieldshavebeencross-checkedandexpandedwiththeotherdatasetsincludedinthisreportasexplainedbefore.Inconsistenciesacrossdatasourceshavebeenresolvedwheneverpossibleandnewclassificationssuchas‘Complianceentities’areincludedintheanalysis.4.3.4.2Marketstructure:executionvenuesandcontracttypes216.Onaveragemorethan85%ofthenotionalamountsofEUAderivativesaretradedETD,whichcorrespondsto90%ofthetrades(Figure20).Basedontheclientreports,notionalamountstradedpermonthhaveincreasedfromEUR25billioninJanuary2020toalmostEUR94billioninDecember2021,andfrom200,000tradestoalmost400,000trades.76InthecaseofderivativesconcludedonatradingvenueandclearedbyaCCPonthesameday,onlytheclearedformofaderivativeisreported.77Clearingmember’sowntradingisincluded,althoughestimatedtoberelativelysmall.59Figure20:Notionalamounts(EURbillion,leftchart)andnumberoftrades(thousands,rightchart)byETD/OTCsplit.Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.217.TheshareofnotionalamountsofEUAderivativestradedinfutureshasdecreasedfromapproximately70%inJanuary2020to53%inDecember2021(seeFigure21).Options,ontheotherhand,haveincreasedfrom17%to27%oftheamountstraded,followedbyforwards.Futures,however,correspondtoroughly90%ofthenumberoftradesacrosstheentiresample.Figure21:Notionalamounts(EURbillion,leftchart)andnumberoftrades(thousands,rightchart)bycontracttype.Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.218.Mostofthenotionalamountstradedarebasedoncontractswithmaturitiesoflessthanoneyear,andmorespecificallytargetingtheendofthecalendaryear.AsseeninFigure22,inJanuary2020contractswithmaturitiesinDecember2020correspondedtomorethan85%oftheamountstraded.InJanuary2021,tradeswithexpirationdateinDecember2021accountedfor75%oftheamountstraded.Attheendoftheperiodanalysed,inDecember2021,tradeswithmaturityinDecember2022represent25%ofthenotionalamountstraded.60Figure22:Outstandingmonthlynotionalamounts(EURbillions)forthetopsixmaturitiesbycontractmaturitydate.Tradeswithnomaturitydateincludedincategory‘Other’.Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.219.InFigure23,thenotionalamountstradeddailyhavebeenadjustedbythespotprice.Onaverage,futuresdisplaylargeramountsthanoptions.However,thereisasignificantdropintheamountsobservedoffuturestradingafterthewithdrawaloftheUK,followingJanuary1st,2021.Foreachyearandcontracttypetheadjustedamountshaveremainedrelativelystable,withanincreaseofthevolumeofoptionsattheendofthesampleperiod.Figure23:Indexofnotionalamountstraded,adjustedbyspotpricepercontracttype.Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.220.Figure24displays,foreachmonthanalysed,theHerfindahl-Hirschmanindexofconcentrationbasedonthenotionalamountstradedperclient78.Thismeasuredisplayshigherconcentrationintheoptionsmarketthaninthefuturesoroverallmarket.AllthemeasuresriseafterthewithdrawaloftheUK,withtheoverallindexshiftingfromanaverageof0.03in2020to0.06in2021.78SeeAnnexforadescriptionoftheHHI.61Figure24:Herfindahl-Hirschmanindexofconcentrationperclientbymonthandcontracttype.Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.4.3.4.3Marketparticipants:sectoractivityandnumberofcounterparties221.Thenumberofmarketparticipantshasincreasedby31%sinceJanuary2021(postBrexit).ThewithdrawaloftheUKcorrespondstoadropofapproximately38%ofthecounterpartiesreportingtheirtradesinEUAderivativesbetweenDecember2020andJanuary2021(Figure25).However,theshareofentitiesbysectorhasremainedrelativelystable,withcomplianceentitiesamountingtoapproximately40%ofthetotalnumberofcounterparties,followedbyothernon-financialcompanies,fundsandinvestmentfirmsorcreditinstitutions.Figure25:Numberofactivecounterpartiestradingbymonthandsector.CounterpartiesreportedasclientcodesinsteadofLEIsareexcluded.Allreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.222.Onaverage,non-financialcorporationsaccountfor63%ofthenotionalamountsand54%ofthetrades(Figure26).Whiletheirshareofnotionalamountshasremainedrelativelystable,theirshareofthetotalnumberoftradeshasdecreasedfromaround6255%inJanuary2020toroughly36%inDecember2021.Thisismainlyduetotherelativeincreaseoftheshareofinvestmentfirmsorcreditinstitutionsduringthesecondhalfofthesample.Figure26:Notionalamounts(EURbillion,leftchart)andnumberoftrades(thousands,rightchart)bysectoroftheend-client.Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.223.Figure27displaystheHerfindahl-Hirschmanindexofconcentrationcomputedbasedonclientsfortwoofthemainsectors,complianceentitiesandinvestmentfirmsandcreditinstitutions.Whileconcentrationoncomplianceentitieshasremainedrelativelystablearound0.4,forinvestmentfirmsandcreditinstitutionsitincreasedpost-Brexit,afterJanuary1st,2021,fromanaverageof0.15in2020to0.27in2021.Figure27:Herfindahl-Hirschmanindexofconcentrationbynotionalamounttradedperclientbymonthandselectedsector.Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.63224.Inthesampleoftwoyearsmostcounterpartieshavetradedbetween0and10days(Figure28).Inthecaseofnon-financialcorporations,85%ofthemhavetradedlessthan50daysduringthesetwoyears,whilefinancialcorporationshaveonaveragetradedmorefrequently.Asmallsampleofentities,roughly3%ofthetotal,hastradedmorethan300days.Figure28:Countofcounterparties(verticalaxis)bysectorandnumberofdayswheretheytradedinthetwo-yearsample(horizontalaxis).Onlyclientreportsincluded.Sources:TRs,ESMA.225.Figure29displaysthesamecalculationasFigure28butwithamoregranularsectorbreakdown.Inthiscase,non-financialcorporationsareclassifiedinto‘Complianceentities’and‘Othernon-financials’.68%ofcomplianceentitieshavetraded10daysorless,whileonly37%ofthefundshavetradedatthatfrequency.Figure29:Countofcounterparties(verticalaxis)bysectorandnumberofdayswheretheytradedinthetwo-yearsample(horizontalaxis).Onlyclientreportsincluded.Sources:TRs,ESMA.226.Non-financialcounterpartiesneedtoreportthefield‘Directlylinkedtocommercialactivity’.Basedonthisfielditispossibletoanalysewhetherthetradingisexecutedforhedgingpurposesornot.Slightlymorethanhalfofthenotionalamountsreportedby64non-financialcounterparties(whichincludecomplianceentitiesandothernon-financials)aretradedforhedgingpurposes(Figure30)79.Onaverage,hedgingcorrespondsto53%oftheamountsand51%ofthetrades.Inaddition,theshareofhedgingtradeshasincreasedfrom48%oftheamountsinJanuary2020toroughly60%inDecember2021.Figure30:Notionalamounts(EURbillion,leftchart)andnumberoftrades(thousands,rightchart)ofnon-financialcorporationsbyhedgingstrategy.OnlyreportsfromNFCsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.227.UnderEMIR,counterpartiesmustreportwhetheraderivativeisanintragrouptradeforalltradesexceptforthoseexecutedontheregulatedmarkets(orthird-countryvenuesequivalenttotheregulatedmarkets).Notionalamountsofintragrouptradesare,onaverage,aboveEUR2billionpermonthintheperiodstudied(Figure31).AfterthewithdrawaloftheUK,thiscorrespondstoanaverageofmorethan3,000tradespermonth.WhatwecanfurtherobserveisamaterialnumberofintragroupexposuresbetweenEEAandnon-EEAentities.GiventhatthereportingobligationunderEMIRdoesnotapplytothird-countryentities,wecannotfurtherinvestigatewhoistheend-clientofthesetransactionsasweonlyobservethatthesenotionalamountsaretransferredoverseas.Whetherthesederivativesarestayingwithinthisgrouporareresoldtootherclientsremainsunclear.79ESMAexperiencewiththeanalysisofdatareportedunderEMIRshowsthatthepopulationofthefieldwhichallowstoindicatewhetheratransactionisconcludedwiththeobjectiveofhedgingrisksemergingfromthecommercialactivityorthetreasuryneedsofanentityisnotalwayscorrectlypopulated.Thispossiblygivesanunderestimationofrealhedgingactivity.65Figure31:Intragroupnotionalamounts(EURbillions)andnumberoftrades(thousands)4.3.4.4Geographicaldistribution:EEA30vsnon-EEA30countries228.Onaverage,notionalamountstradedbyclientslocatedinDEaccountformorethan40%ofthetotalamounts(Figure32)tradedbyEEA30clients.ThecorrespondingshareoftheamountstradedbyclientslocatedinNLhasgrowninrecentmonthsfrom13%inJuly2021toaround30%inDecember2021.Asimilartrendcanbeobservedinthetotalnumberoftrades,whereclientslocatedinDEaccountonaveragefor40%butthetradesofNL-basedclientsamountto36%ofthetotalinDecember2021.Figure32:Notionalamounts(EURbillion,leftchart)andnumberoftrades(thousands,rightchart)bycountryoftheend-clientforthetopEEA30countries(orderedbynotionalamount).Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.229.Non-EEA30clientstradelessthanEEA30ones,buttheirrelativeshareintotaltradingdeclinedsubstantiallyduetoBrexit.AfterthewithdrawaloftheUKfromtheEU,clientslocatedinGBandCHaccounted,onaverage,for75%ofthenotionalamountstradedbynon-EEA30clients(Figure33).Thiscorrespondstoroughly60%ofthetradesinthe66sametimespan.FromDecember2020toJanuary2021,followingthewithdrawaloftheUKfromtheEU,notionalamountsreportedbythird-countryentitiesdeclinedby80%betweenDecember2020andJanuary2021,andthenumberoftradesby85%.Figure33:Notionalamounts(EURbillions,leftchart)andnumberoftrades(thousands,rightchart)bycountryoftheend-clientforthetopnon-EEA30countries(orderedbynotionalamount).Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.804.3.4.5Options:tradingvolumesandcounterpartiesperstrike-prices230.ThissubsectionfocusesontheoptionssegmentoftheEUAderivativesmarketasitrepresentsasignificantamountoftradingactivityintheobservationperiod.Optionspossessdifferentcharacteristics,forexamplethestrikepriceorthetypeofrightitgivestothebuyer(i.e.sellingorbuyingtheunderlyingatastrike-price).Toinvestigatedistinctoptionpatterns,weuseancillaryinformationreportedinEMIR.Essentiallythismeansnofurther(reference)datasourcewasnecessarytocomputetheinformationthatisdepictedinthefollowingexplorativeanalysis.AsweuseadditionalEMIRfieldsspecificdatacleaningandaggregationprocedureswherenecessarytoenablethisanalysis.Toexcludeimplausiblevaluesandtomakethevisualisationmeaningfulandstraightforwardallstrikepricesabove120EURwereexcluded.Afterthispreliminarycleaningthedataisfurtheraggregatedbythenotionalamounttradedineachstrikeprice.Finally,theresultsarebinnedintostrikepricebucketsof10EUR(e.g.[0EUR:10EUR),[10EUR:20EUR)).231.Thenexttwofiguresfocusontherelativemonthlynotionalamount(inpercentage)thatisassignedtoeachstrikepricebucketandvisualizedontothetwoheatmapsshownbelow.Usingrelativemonthlynotionalamountsavoidsanybiasofthecharttowardstheendof2021wherenotionalamountsincrease.Itshouldbenotedthateachmonthaddsupto100%andnotthewholevisualizationitself.Focusingontheputoptionsandtheir80Countrycodesdisplayedrepresentcountriesasfollows.GB:UnitedKingdomofGreatBritainandNorthernIreland.CH:Switzerland.US:UnitedStatesofAmerica.AU:Australia.KY:CaymanIslands.BM:Bermuda.IL:Israel67tradingpatternswecanseeaclearevolutionalongwiththespotprice(notshowninthefigure).Thisisnothingunusualandwasexpectedasoptionswithastrikepriceclosetotheunderlyingpriceareusuallymorefrequentlytradedandliquid.Furthermore,wecanobservethatasthespotpricerisesthevolumesbecomemoredistributedaroundthestrikeprice(verticalaxis)indicatingaslightshiftintheusageoftheoptions.Figure34:Relativenotionalamountstraded(%)inputoptionsbystrikepriceandmonth.Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.232.Thenextfigureextendstheanalysistocalloptions.Asinthepreviouschart,wewitnessaclearevolutionalongwiththepricethathasincreasedduringtheobservationperiod.Further,wecanobservethatthedistributionofrelativevolumesaroundthespotpriceishigherthanforputoptions,andalargeamountoftradingactivityonoutofthemoneyoptions.Outofthemoneyoptionshavenointrinsicvalueandtheirpricestronglyreacts(amongotherparameters)totheunderlyingpriceanditsvolatility.Insuchaformtheseoptionsprovideacertainleveragetothebuyersofacalloption,thatcomeswiththeriskthattheseoptionsexpireworthlessiftheunderlyingpricedoesmoveoverthestrikeprice.68Figure35:Relativenotionalamountstraded(%)incalloptionsbystrikepriceandmonth.Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.233.Afterhavinginvestigatedthestrikepricesofmosttradedoptions(innotional)theanalysisfocusesonthenumberofcounterpartiesthatareactiveeachmonthineachstrikeprice.Onceagain,theresultsdepictedbelowareshowninrelativeterms(i.e.aspercentages),withonemonth(onebar)addingupto100%.234.Figure36showstherelativenumberofcounterpartiesactiveperstrikepriceinputoptions.Thefirstobservationthatwecanmakeisthatmorestrikepricesbecomevisiblecomparedtothepreviousvisualisation,whichmeansalthoughmostofthenotionalamountstradedaroundthespotprice(whichisnotshowninchart)marketparticipantsareactiveinotherstrikepricestoo.Thereseemstobearelationbetweenspotpricesandactivityindifferentstrikeprices.Additionally,wecanobserveasmallamountofmarketparticipantstradingputoptions(withsmallnotionalamounts)abovethespotprice.69Figure36:Relativenumberofcounterparties(%)tradingputoptionsbystrikepriceandmonth.Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.235.Figure37showsthesameanalysisforcalloptions.Likethechartaboveweobserveawiderdistributionalongthestrikepricescomparedtothetradednotionalcharts.Comparedwithputoptions,wefurtherwitnessawiderdistributionacrossstrikepriceswhichisgrowingovertime.Inaddition,thesechartsunveilactivityoninthemoneyoptionsbelowthespotprice,althoughtheirrelatednotionalamountisminor.Noteworthyinthiscontextistheactivityofdeepinthemoneyoptionsintheendof2021.Consideringtheotherendoftheoptionspectrum,i.e.outofthemoneycalloptions,weobservethattherelativenotionalamountsfromFigure35aresomewhatoutofproportioncomparedtothenumberofentitiesactiveinthesestrike-prices.Thisindicatesthatthesenotionalamountstradedarequiteconcentratedamongalimitednumberofentities.Figure37:Relativenumberofcounterparties(%)tradingcalloptionsbystrikepriceandmonth.Onlyclientreportsincluded.DateofwithdrawaloftheUKhighlighted.Sources:TRs,ESMA.70236.Themajorityofnotionalamountsandtradesexecutedhaveend-clientsclassifiedas‘Othernon-financials’(seeFigure38).Theyaccount,onaverage,for42%oftheamountsand40%ofthetrades.However,theirshareofnotionalamountshasincreased,from33%inJanuary2020to70%inDecember2021.Inthecaseoftrades,theshareatthebeginningofthesamplewas41%andreached67%attheendoftheperiodanalysed.Complianceentities,ontheotherhand,areresponsibleonaveragefor30%oftheamountsandtrades.4.3.4.6Figure38:Notionalamounts(EURbillions,leftchart)andnumberoftrades(thousands,rightchart)inoptionsbymonthandsectoroftheend-client.Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.Posttradeinfrastructure:clearingmembers237.Inthissubsectionouranalysisfocusesonposttradingaspectsofthemarket,whereweaimtoshedlightonposttradeactivityinemissionsderivatives.Indoingsowepresentanoverviewonthelocationofclearingmembersandconcentrationinclearingmembers.Itshouldbenotedthatinthisspecificsubsectionsomeofthechartsareproducedonthewholesampleofemission-derivativereports,unveilingespeciallypost-tradeoperationsthatcanbeonlyobservedinEMIR.Thedatasampleusedisdescribedinthefootnoteofeachchart.First,wehighlightinFigure39thedifferentpost-tradingrolesandtheirnotionalamountsreportedforeachrole.AsmentionedintheintroductionsubsectionoftheEMIRanalysisESMAhasmadeitsanalysisfromtheend-clientangle.ThisallowedESMAtoobservewhoistradingsuchinstruments,e.g.bysector.During2020,clearingactivities(clearingmember–CCPtrades)representedonaveragemorethan60%oftheamountsreportedpermonth.FollowingthewithdrawaloftheUK,tradesbetweennon-clearingmembersandclearingmembersaccountformostofthenotionalamountsexecuted,representingaswellapproximately60%ofthemonthlyamounts.71Figure39:Notionalamounts(EURbillions)bymonthandpost-tradeactivityrole.Allreportsincluded,selectedrolesdisplayed.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.238.TheHerfindahl-Hirschmanindexofconcentrationdisplayshighervalueswhenanalysedfromtheclearingmemberperspective(seeFigure40)insteadoftheclient’spointofview.Theoveralltrendissimilar,withoptionsbeingmoreconcentratedthanfuturesandtheoverallindex.In2020theoverallindexaverages0.1comparedto0.19in2021.Figure40:Herfindahl-Hirschmanindexofconcentrationbynotionalamounttradedperclearingmemberbymonthandcontracttype.Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.239.MostofthenotionalamountsofEUAderivativestradedwithEEA30clearingmembersareclearedbyclearingmemberslocatedinFR(seeFigure41).Onaverage,thiscorrespondsto60%oftheamountsand63%ofthetrades.Intherecentmonths,clearingmemberslocatedinNLhaveincreasedtheirshareoftheactivity,reaching26%ofthenotionaland48%ofthetradesinDecember2021.72Figure41:Notionalamounts(EURbillion,leftchart)andnumberoftrades(thousands,rightchart)bycountryoftheclearingmemberforthetopsixEEA30countries(orderedbynotionalamount).Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.240.Thenumberofclearingmembersobservedintheclientreportshasslightlydecreased,from43inJanuary2020to37inDecember2021(seeFigure42).FollowingthewithdrawaloftheUKon1stJanuary2021,thenumberofclearingmembersobserveddecreasedby15%.Figure42:Numberofclearingmembersbymonthandregion.Onlyclientreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.4.3.4.7Relatedderivatives:cross-marketobservations241.Inthissubsection,ESMAextendsthefocusoftheanalysistowardsothercommoditysegmentsthatarerelatedtoemissionallowances.Thesearemainlyoil,gasandcoalderivatives,socommoditiesthatarerelatedinthevaluecreationchaininindustrialprocesses.Thegoalistounderstandwhetherthereisanoverlapbetweentheentitiestradingthesederivativesover-the-counterandhowtheyhaveevolvedoverthelasttwoyears.73242.Figure43showsthenumberofentitiestradingemissionderivativesandtheirusageofotherrelatedderivatives.Beforehandweneedtobearinmind,likefortherestofthisEMIRsubsection,thatwiththewithdrawaloftheUKthenumberofentitiesreportingdeclined.ThisisclearlyvisiblebythedropinthechartbetweenDecember2020andJanuary2021.Consideringthedifferentcategories,wecanobserve“emissionsonly”(35%)and“morethanone”(47%)clearlydominatethenumberofentities.Thismeansthatemissionallowancederivativesareeitherusedbyentitiessolelywithoutanyrelatedderivativeortheyusemorethanonerelatedderivative.Ifentitiesonlyuseoneadditionalrelatedderivativeitislikelytobeeitheroil(7%)orpower(7%)derivativeswhileitisunusualtousecoal(1%)derivatives.Figure43:NumberofentitiestradingofEUETSallowancesandotherrelatedcommodities.Categoriesshowtheothercommodityderivativeused.Ifmorethananothercategorywasidentified,itisclassifiedas‘Morethanone’.Allreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.243.OilandoilproductsarethepredominantcommoditybynotionalamountstradedOTC(seeFigure44).Onaverageintheperiodstudiedtheyrepresent94%oftheamountstradedinenergy-relatedcommodities,followedbygaswith4%.EUAsrepresented0.2%oftheamountstradedinJanuary2020and0.7%inDecember2021.74Figure44:Relativenotionalamountstraded(%)OTCbycommoditytypeandmonth.Onlyenergy-relatedcommoditiesincluded.Allreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.244.Forthesamecommoditytypes,Figure45displaystherelativeshareofnotionalamountsbycontracttype.Futuresdominate,with94%oftheamountsonaverage,followedbyoptions,contractsfordifferenceandswapswithapproximately2%each.Theshareofamountstradedwithfutureshasremainedrelativelystable,shiftingfrom92%inJanuary2020to91%inDecember2021.Figure45:Relativenotionalamountstraded(%)OTCbycontracttypeandmonth.Onlyenergy-relatedcommoditiesincluded.Allreportsincluded.ThedottedbarmarkstheUKwithdrawaldatefromtheEU.Sources:TRs,ESMA.4.3.5AnalysisbasedonMiFIDtransactionreports4.3.5.1Introduction:datacharacteristicsandlimitations245.Forthefollowingsubsections,ESMAusedtransactiondatareportedunderArticle26ofMiFIRwhichcontainsinformationabouttradingactivity.Thisdatasetprovidesimportantadditionalinsightsontradinginemissionallowancesduetothewiderscopeofreporting75comparedtoEMIR.Inparticular,tradinginspotemissionallowances,non-derivativeinstrumentsandtheactivityofthird-countryfirmsaremorevisibleinthisdataset.Notably,post-BrexitdataismorecompletethaninEMIRreportsbecausecounterpartieslocatedintheUKarenolongersubjecttotheobligationtoreportunderEMIRwhiletheyremainvisibleinMiFIRreportsduetotheexistingobligationofTradingVenuestoreportthosetradesthatareexecutedbymembersthatarenotsubjecttoMiFIR.246.TheassessmentcarriedoutonMiFIRtransactiondatainthecontextoftheEUcarbonmarketrevealedsometransversalanalyticallimitationsandpolicyrelatedgapswiththelatterbeingdescribedindetailinsection6.2.2ofthereport.Concerningtheanalyticallimitations,thefollowingshouldbeconsideredtobetterunderstandtheachievedresultsandthecomplexityinperformingthedifferentstepsoftheanalysis.247.First,ashighlightedinESMA’spreliminaryreport,themainderivativesexchangeontheseinstrumentsfullymigratedfromtheUKtotheNetherlandsinJune2021.Thus,thetimeperiodfortheanalysiscouldonlybereasonablybasedonalimitedperiodfromJune2021untiltheendof2021.248.Second,thefullsetofdatathatwasmadeavailabletoESMAhasbeensubjecttoacomplexprocessofinterpretationduetothedifferentstructuresofNCAs’databases.Giventhatthisanalysiscoversdatafrom2021,thesechallengeswereduetotheabsenceofdatacentralisationandmanagementatESMA’sleveloftherelevantMiFIRtransactiondata,whichupuntilJanuary2022wasbeingcollectedandstoredexclusivelyattheNCAs’level.249.Third,theprovisionofde-duplicateddataonthebasisofaharmonisedquerywasnotpossibleduetothechallengesraisedbyNCAsinrelationtothelimitedtimeframesaswellastheneedtodevelopaqueryforde-duplicatingtransactiondata.Thisprocessischallengingwhentheorderexecutedonthevenueisaggregatedforseveralclientsorforthesametransactionmultiplereportingchainsofintermediariesareinvolved.Thisisduetotheincorrectuseorabsenceofsomeidentifiersthatwouldfacilitatereconstructingthehistoryoftradingpatternschainsanddeduplicatethetransactionreportsforcarryingoutquantitativeanalysis(seepolicyrecommendationinsection6.2).However,duringtheanalysis,itemergedthatmosttransactionswereexecutedontradingvenues(94%oftransactionsreportedaMICcodeinthevenuefield,ofwhich88%inICEEndex)andonly6%off-venue.ThepresenceoftransactionchainswasfoundtobelimitedasthemajorityofreportsincludedtheMICofthetradingvenue,anindicationofmarketfacingtransactions.4.3.5.2Dataanalysismethodology250.MiFIRtransactionsonEUAderivativeswerereceivedfromBaFin,AFMandNOFSAandalldatawereharmonizedandmergedinasingledataset.Thedatasetwaslimitedtodatesfrom1stJune2021toDecember2021.VenuesareanimportantsourceofreportingfortheMiFIRdatasetthatcapturetransactionsbetweenentitiesthatarenotsubjecttoreportingobligations.Priortotheperiodofdataexamined,themainvenuedealinginEUArelatedinstrumentshadnotfullymigratedfromtheUKtoNL.Therefore,theprecedingperiodofdataisfarlessrepresentativeoftheactualtradingactivity.Records76pertainingtoprimarymarkettransactionswereexcludedandtheremainderofthedataconcernsonlysecondarymarkettransactions.Two-sidedreportingdeduplicationwasperformedmatchingthedimensionsofbuyer,seller,date,priceandquantityatlevelofeachtransactionreportsresultinginamodestreductioninthenumberofreports.Thetransactionswereaggregatedatlevelofeachentityandthenumberofbuyandselltransactionswerecalculatedbycountingthenumberofreportswhereagivenentityisabuyerandthenumberofreportswheretheentityisaseller.Thetotalnumberoftransactionsbyentityusedinthisanalysisisderivedfromthesumofbuyandselltransactionsdividedby2foreachentity.251.ANNA,FIRDS,GLEIFandESMAcounterpartydatawereutilizedtoretrieveinformationontheinstrumentandcounterpartycharacteristics(suchasmaturities,pricemultipliers,countryallocationandsectorclassifications)toperformtheassessmentonthefrequencyandvolumeoftrading.Thetradingfrequencyisestimatedbycountingthenumberoftransactionreports.Thevolumewascomputedastheproductofprice,quantityandthepricemultiplierofagiveninstrumentoverdifferentbreakdowns.Thepriceandquantityfieldsinsomecasesincludedproductsofpriceandquantityorquantityandpricemultipliers.Inotherwords,insomecasesthecounterpartiesreportedEUAequivalentquantitiesinsteadofquantitiesintermsofthederivativeinstrumenttraded.Concerningtheprice,insomecasesthetotalpriceforthetransactionwasreportedinsteadofthepriceperunit.Thefiguresinthesefewcaseswereidentifiedandconvertedtorepresenttheexpectedquantitiesandpricesthatrefertothecontractsandnottheentiretransactionorunderlyinginstrument.Foroptioncontractsthestrikepricewasusedinsteadoftheprice.Thereafter,thenumberoftransactionsandvolumeboughtorsoldforeachcounterpartywereaggregatedacrossmultipledimensions,suchassectorandtypeofinstrument.Intheremainderofthesection(4.3.5),chartsandfiguresexcludethetradingactivityandvolumesboughtorsoldattributedtoCCPs.4.3.5.3Entitiesparticipatinginthemarket(countofbuyers/sellers)252.Thetransactiondataunderanalysisallowstheidentificationofthedisposerofthefinancialinstrumentandclientswhetheritisaphysicalperson(NationalID)oralegalentity(LEI).ForthepurposeofArticle26ofMiFIR,anacquisitionordisposalofafinancialinstrumentincludesapurchaseorsaleofareportablefinancialinstrument,asimultaneousacquisitionanddisposalforwhichthereisnochargeinbeneficialownershipoftheinstrumentorenteringintoorclosingoutofthereportableinstrument.TheaggregateddatareceivedfromthethreeNCAs(NOFSA,BaFin,AFM)aremainlyrepresentedbylegalentities(99.2%LEIs)andhavebeenclassifiedaccordingtotheapproachdefinedinsection4.3.2.duetotheabsenceofasectorallocationfortheidentifiersforeseeninthetransactionreportingunderArticle26ofMiFIR.Asexpected,Figure46showsthatthemaincategoriesofactivecounterpartiesinvolvedinthetransactionactivityoverJune2021andDecember2021weremostlyinvestmentfirmsorcreditinstitutions,complianceentities,fundsandothernon-financials.77Figure46:Numberofdistinctcounterparties,excludingphysicalpersons.Source:MiFIRtransactionsprovidedbyBaFin,AFM&NOFSA253.ThetotalnumberofidentifiersforcounterpartiesinvolvedinthetransactionactivityoverJune2021toDecember2021is3673,excludingthe2555non-LEIthatrepresentanegligiblenumberoftransactionsforwhichthereportedcounterpartiesaremostlyindividuals,aggregateclientaccounts,andVenues.TheremainingLEIcodeshavemostlybeenclassifiedaccordingtothefollowingsectors:complianceentities(364),investmentfirmsorcreditInstitutions(349),funds(180),othernon-financials(155)andfinancials(9)andCCPs(4).WithintheLEIpoolofentities,57entitieshavenoknownclassification,28EUbased,27thirdcountrybasedand2UKbasedentities.Outthethirdcountryunclassifiedentities,thetop3countriesbycountofentitiesaretheUS(11),CH(6)andKY(3).254.Thetotalnumberoftradesexecutedfortheperiodfrom2ndhalfof2021isroughlyequalto2.3millionandincludesallreportsandcounterpartyidentifiers(Entities,Physicalpersons)exceptCCPs.ThepercentageofentitiesclassifiedasinvestmentfirmsandcreditInstitutionsrepresent61.47%oftotaltransactions(Figure47).Figure47:Numberoftransactionsas%oftotalbysectorclassification.Source:MiFIRtransactionsprovidedbyBaFin,AFM&NOFSAInvestmentfirmsorcreditinstitutionsOthernon-financialsFundsComplianceentitiesUnclassifiedOtherfinancialsNon-LEIJun-215.19%2.27%0.87%0.59%0.16%0.73%0.10%9.91%Jul-217.86%2.94%1.16%0.60%0.32%0.54%0.17%13.58%Aug-216.85%2.47%0.95%0.54%0.35%0.07%0.18%11.41%Sep-2110.33%3.41%1.38%0.90%0.38%0.10%0.23%16.74%Oct-2111.13%3.18%1.37%0.78%0.37%0.02%0.20%17.05%Nov-219.56%2.61%1.64%0.68%0.36%0.02%0.17%15.04%Dec-2110.55%2.80%1.64%0.67%0.29%0.02%0.30%16.27%61.47%19.67%9.01%4.77%2.22%1.49%1.37%100.00%78255.Asshowninthetableabove(Figure47),onlyasmallportionoftransactions(2.22%)originatesfromunclassifiedentitiesandnon-LEIsthatrepresentphysicalpersons(0.79%)andaggregatedclientaccounts81(0.58%).256.Unclassifiedentitiesmostlytradefutures(96%)andmostcounterpartiesarethird-countryentities.Moreconcretely,about78%oftransactionsinvolvingunclassifiedcounterpartiesinvolveUSorCHentities.Figure48:Numberoftransactionsbysector(Thousands).Source:MiFIRtransactionsprovidedbyBaFin,AFM&NOFSA257.Thechartabove(Figure48)showsastableandincreasingtrendoverthedifferentsectorclassificationsandstratificationintermsoffrequencyoftradesbythedifferentcategories.Inparticular,thecategoryoffundshasincreasedmorecomparedtotheother’stradingactivityovertheanalysedperiod.81Whentheorderexecutedonthevenueisaggregatedforseveralclientsthebuyer/sellerfieldsarepopulatedwiththecode‘INTC’.79Figure49:Numberoftransactionsovertimebysector(Thousands)includingEUandnon-EUbuyers/sellers.Source:MiFIRtransactionsprovidedbyBAFIN,AFM&NOFSA258.Thechartabove(Figure49)highlightstheevolutionovertimeoftheexecutedtransactionsassociatedtotherelevantcategoriesofsectorclassificationacrossEUandthirdcountrycounterpartiesinvolvedinthereportedtransactions.Thetradeactivityofcomplianceentitiesremainedquitestableandlowcomparedtotheactivityallocatedtoinvestmentsfirms/creditinstitutionsforwhichthereareseveralinstancesofupwardanddownwardshifts,especiallyinQ42021.Thispatternseemstoreflecttheactivityinthemostliquidfuturecontractswhichhavematuritiesattheyear-end.Othernon-financialsandfundstrendlinesshowanormalandstablepatternthatispositionedbetweenthemajoractivityofinvestmentfirmsandtheharmoniouslowslopingtrendofcomplianceentities.ThehighestnumberofexecutedtradeswasaccountedforinOctober.4.3.5.4Overalltradingactivityandevolutionintime259.Thechartbelow(Figure50)showsthetotalnumberoftransactionsbycountry.ThetradingexecutionisconcentratedintheNDEXtradingvenueintheNetherlands(~85%)andpertainslargelytobuyersandsellersthatarelocatedintheUnitedStates,theUK,theNetherlandsandGermany.ThereisapresenceoftradesfromcounterpartiesinSwitzerlandandtheCaymanIslands(6.8%and6%oftotaltransactionsrespectively).CaymanIslandsentitiesaremainlyothernon-financialentities(3.3%)andfunds(2.6%)overalltransactions.ThelargestEUcountriesareNL(12.25%)andDE(11.41%)whichcomeaftertheUS(25.86%)andtheUK(24.98%).80Figure50:Numberoftransactions(Thousands)bytop10countriesincludingEUandnon-EUbuyer/sellers.Source:MiFIRtransactionsprovidedbyBaFin,AFM&NOFSA260.Focusingonthetop10bycountriesbynumberoftradeswithintheEU(Figure51),GermanyandtheNetherlandsareconfirmedasthemosttradingcounterpartiesintermsofendbuyerorseller.EntitiesfromtheNetherlandsandGermanyaccountfor(33.30%and31%respectively)oftotaltrades,followedbyFrancewith(16.57%).Figure51:Numberoftransactions(Thousands)bytop10EUcountries.Source:MiFIRtransactionsprovidedbyBaFin,AFM&NOFSA261.Intermsofnumberoftransactions,investmentfirms,creditinstitutions,otherfinancialsandfundsmostlytradeinfutures(Figure52).Tradingactivityinfuturesishigherfor81maturitiesupto1year.TheresidualnumberoftransactionstradedareforentitiesthatdonothaveanLEIandrepresentphysicalpersonsandaggregateaccounts.Figure52:Numberoftransactions(Thousands)byinstrumenttypeandsector.Source:MiFIRtransactionsprovidedbyBaFin,AFM&NOFSA262.Thefollowingchart(Figure53)servesasacomparisonbetweenthesectorsacrosscountries.Thelargestsectorsbynumberoftransactions,areUKinvestmentfirms/creditinstitutions,followedbyUSFundsandin3rdplaceDEOthernon-financials.Thechartoutlinesthatthesinglemostactivesectorinthemarketacrosscountries,bynumberoftrades,appearstobeUKinvestmentfirmsorcreditinstitutions,followedbyUSfundsandGermanothernon-financials.263.Overall,groupingthetransactionsbythesectorandcountryrevealsasignificantpresenceintradingactivitybythird-countryentities.Theseentitiesmainlyrepresenthigh-frequencytradingfirmsandmarketmakersengaginginalgorithmictradingthatareactingasliquidityprovidersandareholdingsmallnetpositions.Whilethepresenceoftheseentitiesinthemarketdoesnotinitselfraiseconcerns,ESMAconsidersthatpotentialadditionalmeasurestoimprovethevisibilityoftheseactivitiesinsupervisorydatamightbeneeded.264.Themostfrequentlytradedinstrumentsacrosssectorsandcountriesareinfutureswithamaturitybetween6monthsand1year.WhileGermanothernon-financials,complianceentitiesandinvestmentfirmsalsopresenttradinginfutureswithmaturitiesofover1year.82Figure53:Top15combinationsofsectorclassificationandcountrybynumberoftransactions(Thousands)includingEUandnon-EUcounterparties.Source:MiFIRtransactionsprovidedbyBaFin,AFM&NOFSA265.Concerningtheinstrumenttypestraded,FuturesdominatewithimportantpeaksbetweenSep-Oct2021andDecember2021especiallyformaturitiesupto1year(Figure54).Thetradingactivityinlongermaturities(overoneyear)ismainlyconcentratedtowardstheendoftheyear,whereasthetradinginfutureswithashortermaturitylapseisconsistentlydistributedoverthemonthsunderanalysisFigure54:Numberoftransactions(Thousands)overtimebyinstrumenttype.Source:MiFIRtransactionsprovidedbyBAFIN,AFM&NOFSA834.3.5.5Distributionofvolumesbysectorandinstrumenttype266.Intermsofaggregatedvolumebought,Figure55belowshowsthatthatinvestment/creditinstitutionsdominateintermsoftradingvolumesacrosstheperiodfromJunetoDecember2021.Figure55:Totalvolumebought(EURBillion)bysectorincludingEUandnon-EUcounterparties.Source:MiFIRtransactionsprovidedbyBaFin,AFM&NOFSA267.Figure56breaksdownvolumesbytypeofentityandrevealsthat60%ofthetradedvolumeisconcentratedinfutureswithmaturitieslongerthan6months.Investmentfirms/creditinstitutionsandcomplianceentities,othernon-financialsandfundstrademostlyinfutureshavingmaturitiesupto1year.Volumesinfutureshavinglongermaturitiesover1yearrelatethesametopthreesectorcategories(investmentfirmsorcreditinstitutions,othernon-financialsfunds)andComplianceentities.Investmentfirms/creditinstitutions,fundsandnon-LEIsarealsoactiveintheoptionsegmentthataccountsroughlythe30%ofthetotaltradedvolume.Instead,thetransactionvolumesforspotandfutureswithshortmaturitiesarerelatedtoinvestmentfirmsandcreditinstitutions,meanwhiletheMinifuturescertificatesrepresentonlyasmallportionoftheoveralltradingvolumesacrossthediversesectors.268.TheaveragemonthlyEUAequivalentvolumetradedfortheperiodJunetoDecember2021isEUR56.74billion.84Figure56:Totalvolumebought(EURBillion)bytypeofinstrumentandsectorincludingEUandnon-EUcounterparties.Source:MiFIRtransactionsprovidedbyBaFin,AFM&NOFSA269.FromFigure56,weseethevolumesinoptionssteadilypickingupfromAugust2021toDecember2021.Thetradingvolumeactivityonfutureshavingmaturityoveroneyearismainlyconcentratedinend2021,whereasthetradingonfutureswithamaturitylapseshorterthanoneyearisconsistentlydistributedoverthemonthsunderanalysis.TheotherinstrumentcategorieshaveremainedrelativelyconstantintermsofvolumetradedfromJunetoDecember2021.Figure56:Totalvolumebought(EURBillion)byinstrumenttype.Source:MiFIRtransactionsprovidedbyBaFin,AFM&NOFSA854.3.6Analysisbasedonweeklypositionreports4.3.6.1WeeklyreportsonEUETS270.Weeklypositionreportsinemissionallowancesandderivativesonemissionallowances–requiredonlyonthemostliquidcontracts,i.e.thosewithatleast20marketparticipants–servedasbasisfortheinitialassessmentoftheevolutionofthenumberofmarketparticipantsandtheiropenpositionsinthecarbonmarkets(seeESMA’spreliminaryreportformoredetails).TheavailableweeklypositionreportsonEUAderivativesincludeandcombineopenpositionsinfuturesonEUAsandoptionsonfuturesonEUAsonadeltaadjustedbasis,evenwhentheoptionandthefuturecontractshaveadifferentvenueproductcode.Putdifferently,alloptionsarecalculatedtoadeltaadjustedfuturesequivalent.Evolutionofthenumberofcounterparties271.ThenumberofcounterpartiesholdingapositiononEUAfutureshascontinuedtoincreasethroughout2021andthefirstmonthsof2022,forallthecategoriesofcounterparties,onbothEEXandICE(seeTable4forEEXandTable5forICE).Thescaleoftheincreaseinthenumberofpositionholderswasthesameonbothvenues:onEEX,theyearlyaveragenumberofpositionholdershasdoubledbetween2018and2021,whileonICEtheyearlyaveragenumberofpositionholdersincreasedby106%overthesameperiod.Itisimportanttonotethattheobservedincreaseinthenumberofpositionholdersneedstobereadinconjunctionwiththepositionsheld(asdiscussedinthefollowingsection).272.OnEEX,thecategoryofinvestmentfirmsexperiencedthemostgrowth(230%onaverage)from2018to2022.DuringthesameperiodthenumberofcomplianceentitiesandotherNFCshasincreasedby66%.ESMAnotesthatneitherinvestmentfundsnorotherfinancialsarepresentonthisvenue,withtheexceptionofafewparticipantsin2021.Intotal,from2021to2022thenumberoffirmsactiveontheEEXmarketincreasedonaverageby3%.Morespecifically,thenumberofcomplianceentitiesslightlydecreasedby7%,whiletheinvestmentfirmsincreasedby37%.273.OnICE,whereallcategoriesarerepresented,thenumberofinvestmentfirmsexperiencedarapidexpansion(+205%)from2018to2022.Duringthesameperiod,counterpartiesclassifiedascomplianceentitiesandothernon-financialsincreasedby115%whilethenumberofinvestmentfundsandotherfinancialsincreasedby82%.Inthelastyear,thenumberoffirmsactiveinthemarketincreasedonaverageby3%.Boththenumberofinvestmentfirmsandinvestmentfundsincreased(by16%and1.6%respectively)whilethenumberofcomplianceentitiesremainunchanged.274.Themostrecentdataconfirmthatallcategoriesonalltradingvenuesexperiencedanincreaseinnumber.86EEXComplianceEntitiesandOtherNon-FinancialsFundsandOtherFinancialsInvestmentFirmsTotal2018380104820194401660202056016722021681249320226303396Datauntil4March2022Increasebetweenaverage2018andaverage202265.8%0.0%230.0%100.0%Increasebetweenaverage2021andaverage2022-7.4%-100.0%37.5%3.2%Table4.AveragenumberofpositionholdersonEUAfutures,percategoryofcounterparties,onEEX(source:EEXweeklypositionreports)ICEComplianceEntitiesandOtherNon-FinancialsFundsandOtherFinancialsInvestmentFirmsTotal20181402063838420191542484144320201622784248220213013681007692022301374116791Datauntil4March2022Increasebetweenaverage2018andaverage2022115.0%81.6%205.3%106.0%Increasebetweenaverage2021andaverage20220.0%1.6%16.0%2.9%Table5:AveragenumberofpositionholdersonEUAfutures,percategoryofcounterparties,inICE(source:weeklypositionreportsofICEFuturesEuropeandICEEndex.Weeklyreportsof11and18June2021arenotavailable)275.WhenlookingattheevolutionofthetypesofparticipantsinEUAfuturesandcomparingitwiththeevolutionofEUAprices,therapidincreaseinthenumberofmarketparticipantshighlightedabove,startingfromthesecondhalfof2020,followsthesurgeinthepriceofEUAcontractstradedonICEclosely.ThisisreflectedinFigure58below,wheretheentitiesactiveinthemarketareclassifiedas:1)complianceentitiesandothernon-financials;2)investmentfirmsand3)investmentfundsandotherfinancials.87Figure57:Numberoffinancials(investmentfundsandotherfinancials)andnon-financialsfirms(commercialundertakingsandOperatorswithcomplianceobligationsunderDirective2008/87/ECs)tradingEUAcontractsonICEFuturesEuropeandpriceofDecemberEUAcontractsonICEENDEX,inEURpermetrictonneofCO2.Source:ESMAcommodityderivativesweeklypositionreporting,Refinitiv.276.AsshowninFigure59theratiooffinancialfirms(investmentfundsandotherfinancials)tonon-financials(complianceentitiesandothernon-financials),tradingEUAfutureshasbeenrelativelystableataround150%from2018untiltheendof2020.Afterashort-livedsurgeatthebeginningof2021,itdeclinedfromQ2tosettledownatanaverageof120%.Figure58:Ratiooffinancials(investmentfundsandotherfinancials)overnon-financialsfirms(commercialundertakingsandOperatorswithcomplianceobligationsunderDirective2008/87/ECs)tradingEUAcontractsonICEFuturesEurope,in%.Source:ESMAcommodityderivativesweeklypositionreporting.88277.Moreover,lookingatthecorrelationbetweenthenumberofpositionholdersandEUAfuturesprices,itcanbeobservedthatboththenumberofcommercialentitiesandfinancialsarestronglycorrelatedwithEUAprices(91%and85%respectively).82ICEEUAfuturepriceNumberofcommercialsNumberoffinancialsICEEUAfutureprice1Numberofcommercials0.91311Numberoffinancials0.84730.89121Table6:CorrelationofpriceofDecemberEUAcontractsonICEENDEX,numberoffinancials(investmentfundsandotherfinancials)andnon-financialsfirms(commercialundertakingsandOperatorswithcomplianceobligationsunderDirective2008/87/ECs).Source:ESMAcommodityderivativesweeklypositionreporting,Refinitiv.Evolutionoftheopenpositions278.Theevolutionoftheopenpositions(longpositionsandshortpositionsaggregated)doesnotshowmarkedchangesovertime.Abouthalfofthetotalopenpositionsareheldbycomplianceentitiesandothernon-financials.279.Notably,thepercentageofopenpositionsheldbyfundsandotherfinancials,increasedreachingonaverage10%oftotalopenpositionsin2019and2020,tothendecreasefromthesecondhalfof2021onwards.Attheendof2021,thepositionheldbyfundsandotherfinancialsrepresentedonly5%ofthetotalopenpositions.Theshareofpositionsheldbyfundsandotherfinancialscontinuedtoshrinkinthefirstquarterof2022.280.Themostrecentdevelopmentsofopenpositions,disaggregatedinlongandshortpositions,showthatthenumberofshortpositionsofinvestmentfirms(typicallytheprovidersofallowancesfornon-financialsinthefuturesmarket)temporarilyexceedsthelongpositionsofcomplianceentitiesandothernon-financials.Atthesametimebothlongandshortpositionsoffundsandotherfinancialsdecreasedinabsoluteterms.82Inarecentreport,Oxerafindsthat,despitetheincreaseinnumberofpositionholders,thevolatilityofEUAprice(measuredasstandarddeviation)hasnotincreased.Moreover,thereportfindsasignificantnegativecorrelationinthenumberofpositionsheldbyinvestmentfundsandthevolatilityofEUAfront-monthfuture(Oxera,CarbontradingintheEuropeanUnion,February2022).89Figure59:OpenpositionsonEUAfutures,percategoryofcounterparties,onICEandEEX(source:ICEandEEXweeklypositionreports).Weeklyreportsof11,18and25June2021excludedornotavailable.Figure60:LongversusshortopenpositionsonEUAfutures,percategoryofcounterparties,onICEandEEX(source:ICEandEEXweeklypositionreports).Weeklyreportsof29April,31December2020and11,18and25June2021excludedornotavailable.90Hedgingactivitybynon-financialentities281.Lookingatthehedgingandnon-hedgingactivitybycomplianceentitiesandothernon-financialsitcanbeobservedthattherelativeshareofhedgingandnon-hedgingtransactionshaschangedovertime.282.Overall,themajorityofopenpositionsheldbycomplianceentitiesandnon-financialsinEUAfuturesisforhedgingpurposes.However,itisworthnotingthatwhilenon-hedgingtransactionsrepresentedaveryminorportionofthetotalin2018(onaveragearound30%ofthetotal),thesehavebeensteadilygrowingthroughout2019.Inthefirstquarterof2020,halfofthetotalopenpositionsofnon-financialsconsistedintradeswithnon-hedgingpurposes.Thepercentageofnon-hedgingtransactionsdecreasedinthesecondhalfof2020,tosettledownaroundalong-termaverageof40%in2021andthefirstmonthsof2022.Figure61:NumberofopenpositionsonEUAfuturesheldbycomplianceentitiesandothernon-financials,onICEandEEX(source:ICEandEEXweeklypositionreports).Weeklyreportsof11,18and25June2021excludedornotavailable.4.3.6.2ComparisonwithweeklyreportsonUKETS283.FollowingtheUK’sdeparturefromtheEU,aUKEmissionsTradingSystem(UKETS)wasintroducedon1January2021thatreplacedtheUK’sparticipationintheEUETS.Firstauctionsbeganon19May2021,hostedbyICEFutureEurope,followedbyfirsttradesoffuturescontracts(UKA)onthesecondarymarket.Hence,acomparisonofthetwomarketsispossibleonlyforashorttimespanandmightnotberepresentative.Furthermore,theobserveddivergencesinthetwomarketscouldalsobeassociatedwiththeasofyetnascentstageofdevelopmentoftheUKETSmarket.91Evolutionofthenumberofcounterparties284.Asitwouldbeexpectedfromamarketinthemaking,thenumberofpositionholdersincreasedinallcategoriesofcounterpartiesinthecourseof2021andcontinuedtoincreaseinthefirstquarterof2022.Thus,theUKETSmarketexhibitedsimilartrendsastheEUETSmarketintermsofexpansionoftheaveragenumberofpositionholders.Thescaleofincreasewasmoreprominentincaseofinvestmentfundscategorywheretheaveragenumberofpositionholdersmorethandoubledin2022Q1ascomparedto2021Q4.Alsothenumberofinvestmentfirmsconstantlyincreasedduringtheanalysedperiod.ICEComplianceEntitiesandOtherNon-FinancialsFundsandOtherFinancialsInvestmentFirmsTotal2021Q22105262021Q328610442021Q4341614642022Q134332289Dataasof28May2021–until4March2022Table7.NumberofpositionholdersonUKAfutures,percategoryofcounterparties.Source:ICE285.Notwithstandingthehighernumberofinvestmentfunds,investmentfirmsregisteredasharperincreaseofthetotalopenpositionsheld(i.e.bothlongandshort).Thus,thoughtheaveragenumberofpositionholdersin2022Q1wassignificantlyhigherincaseoffunds,thetotalnumberofopenpositionswassuperiorincaseofinvestmentfirms.Evolutionoftheopenpositions286.Whilethecomplianceentitiesstillheldmostoftheopenpositions,ataround55%in2022Q1,theirsharegraduallydecreasedoverthepreviousperiodsmostlyinfluencedbyanincreaseofinvestmentfirms’activity(seeFigure63).ThecurrentbreakdownwaslargelyresemblingtheoneobservedincaseoftheEUAfuturesmarket.Interestingly,incaseoftheUKETS,theshareoffundsandotherfinancialsismoreprominent(i.e.theshareofopenpositionsin2022Q1istwotimeslargerthanincaseofEUETS).92Figure62.Shareofopenpositionspercategoryofcounterpartyin2021and2022Q1.Sources:ICE287.AslightlyhighershareofopenpositionsheldbycomplianceentitiescouldindicatethatthoseentitiesarestockpilingemissionallowancesasthemarketstilllacksthepoolofallowancesthathasbuiltupovertimeintheEUETSmarket.Putdifferently,ascomparedtothelatter,theoffersideontheUKETSsecondarymarketwaslaggingbehindthedemandside.Thislagismorevisiblewhencomparinglongpositionsofnon-financialsandtheshortpositionsofinvestmentfirms(seeFigure64below).Thus,similarlytotheEUETS,thesepositionsfollowasimilarevolutionovertime.However,incaseoftheEUETSthereisanalmostcompleteoverlapbetweenthelongpositionsofnon-financialsandtheshortpositionsofinvestmentfirms.0%10%20%30%40%50%60%70%80%90%100%21Q221Q321Q422Q1ComplianceEntitiesandOtherNon-FinancialsInvestmentfirmsFundsandotherfinancials93Figure63.OpenpositionsinUKAFuturespercategoryofcounterparty–Longvs.Short.Source:ICEHedgingactivitybynon-financialentities288.Whenanalysingthebreakdownbetweenhedgingandnon-hedgingactivityforcomplianceentitiesandothernon-financialentities,analmostequalshareofrespectivepositionscanbenoticedupuntiltheendof2021Q3followedbyanincreaseintheshareofhedgingactivityfortherestoftheanalysedperiod(i.e.until4March2022).Thepercentageofopenpositionsheldforhedgingpurposeshastendedtograduallyincreaseovertime–anindicationthattheseentitieshaveonlyjuststartedtohedgefuturesales–reachingamaximumlevelofaround76%in2022Q1.However,onaverage,theshareofhedgingpositionsheldbycomplianceentities–onEUETSandUKETSmarket–wasalmostthesameat60%.Thelatterisclosetothelong-termaverageobservedontheEUETSmarket.010,00020,00030,00040,00050,00060,00070,00080,00090,00013/08/202113/09/202113/10/202113/11/202113/12/202113/01/202213/02/2022LONG-ComplianceEntitiesandOtherNon-FinancialsSHORT-ComplianceEntitiesandOtherNon-FinancialsLONG-FundsandotherfinancialsSHORT-FundsandotherfinancialsLONG-InvestmentFirmsSHORT-InvestmentFirms94Figure64:Positionsheldbycomplianceentitiesandothernon-financialsinUKAfutures.Source:ICEFigure65:Hedgingpositionheldbycomplianceentities.Source:ESMAcommodityderivativesweeklypositionreporting,ICE4.3.7Analysisbasedondailypositionreports289.TheanalysisinthefollowingsectionisbasedondailypositionreportswhichNCAsreceivefromtradingvenuesasperArticle58(1)(b)ofMiFIDII.Dailypositionreportsprovidetheposition(generallyexpressedinlots)heldbyendpositionholdersinEUAderivatives.Positionsonoptionsareaggregatedwithpositionsonthecorrespondingunderlyingfuturesonadelta-adjustedbasishencestandalonepositionsonoptionsarenotshowninthisanalysis.-10,00020,00030,00040,00050,00060,00070,00080,00090,000100,0000%10%20%30%40%50%60%70%80%90%11/06/202111/08/202111/10/202111/12/202111/02/2022UKA%ofhedging(4-wmovingaverage)LHSEUA%ofnon-hedging(4-wmovingaverage)LHSTotalnumberofpositions(4-wmovingaverage)RHS0%10%20%30%40%50%60%70%80%90%11/06/202111/07/202111/08/202111/09/202111/10/202111/11/202111/12/202111/01/202211/02/2022UKA%ofhedging(4-wmovingaverage)LHSEUA%ofnon-hedging(4-wmovingaverage)LHS954.3.7.1OverviewofopenpositionsinEUAderivatives290.Figure66andFigure67belowcomparethetotalopenpositionsonthethreeEuropeantradingvenuesofferingEUAderivatives,i.e.ICEEndex(NL),EEX(DE)andNasdaqOslo(NO)inthesecondhalfof2021.ICEEndexhasadominantpositionwith85%ofthetotalpositionswhileEEXholdstheremaining15%andthemarketshareofNasdaqOsloremainsfractional(around0.03%).TherestoftheanalysisfocusesonthepositionsheldinthetwomainmarketsICEEndexandEEX.Figure66:Grosspositions83inEUAderivativesaspercentageofthetotal,breakdownpertradingvenue(sources:ICEEndex,EEX,NasdaqOslo,ESMA)Figure67:GrosspositionsinEUAderivativesinlots,breakdownpertradingvenue(sources:ICEEndex,EEX,NasdaqOslo,ESMA)83Grosspositions:thepositionofagivenpositionholderonagivendayandinagiveninstrument(atISINlevel)istakeninabsolutevalue.Thenallpositionsareadded.Ifapositionholderreportsbothalongpositionandashortpositiononthesameday,sameISIN,thepositionisfirstnettedthentakeninabsolutevalue.964.3.7.2Positionspercategoryofpositionholder291.IssuesrelatedtotheclassificationofcounterpartieswerediscussedinSection4.3.2above.Inlightofthedifficultytoaccuratelyassigncounterpartiesunderthecategories“complianceentities”and“othernon-financials”,bothcategorieshavebeenmergedintheanalysisbelow,undertheuniquelabel“Non-financials”.292.Asalreadyevidencedinthepreliminaryreport,onbothvenues,thebulkofopenpositionsinEUAderivativesisheldbynon-financialcounterpartiesonthelongside,andinvestmentfirms/creditinstitutionsontheshortside(Figure68forICEEndex,Figure69forEEX).Thenetpositionsheldbyfunds(whicharealmostexclusivelyactiveonICEEndex)remainedpositiveandrepresented5%to15%ofthenetpositionsofnon-financials,basedonICEEndexdatainthesecondhalfof2021(Figure70).293.Whenpositionsareaggregatedonagrossbasis(i.e.longpositionsaddedtotheabsolutevalueofshortpositions),thebreakdownofpositionsbetweenthemaincategoriesofcounterpartiesissimilartotheonedepictedinESMA’spreliminaryreportonthecarbonmarket:inthesecondhalfof2021onICEEndex,non-financialswereholding40to45%ofthetotalgrosspositions,investmentfirms/creditinstitutionswereholdingaround50%andtheshareoffundsremainedbelow8%.294.OnEEX,thegrosspositionsareroughlyequallysplitbetweennon-financialononeside,andinvestmentfirms/creditinstitutionsontheotherside,giventheabsenceofothertypesofcounterpartiesonthistradingvenue(Figure71).295.Investmentfirms/creditinstitutionsholdthelargestpositionsintermsofaveragesize(around3,000lots)whiletheaveragesizeofpositionsheldbynon-financialsisroughlyhalfofthat(around1,500lots)andtheaveragesizeofpositionsheldbyfundsismuchsmaller(around200lots)(Figure72).Figure68:NetpositionsinEUAderivativesonICEEndexpercategoryofpositionholder,inlots(sources:ICEEndex,ESMA)97Figure69:NetpositionsinEUAderivativesonEEXpercategoryofpositionholder,inlots(sources:EEX,ESMA)Figure70:GrosspositionsinEUAderivativesonICEEndexpercategoryofpositionholder,inpercentageofthetotal(sources:ICEEndex,ESMA)98Figure71:GrosspositionsinEUAderivativesonEEXpercategoryofpositionholder,inpercentageofthetotal(sources:EEX,ESMA)Figure72:AveragegrosspositionsinEUAderivativespercategoryofpositionholder,inlots(sources:ICEEndex,EEX,ESMA)4.3.7.3Positionspertypeofinstrumentandmaturity296.PositionsintheEUcarbonderivativesmarketareconcentratedinEUAfuturesandoptions.PositionsinEUAfuturesandoptionsconsistentlyrepresentover99%ofthetotalgrosspositionsbasedonICEEndexdailypositionreports,meaningthatEUaviationallowances(EUAA)remainanichemarket.99297.Grosspositionsonthemainmarket(EUAderivatives)areconcentratedintheDecemberexpiryofthecurrentyear(Figure73forICEEndexandFigure74forEEX).298.OnEEX,wheretheobservationperiodisthesecondhalfof2020andtheyear2021,twocyclescanbeobserved,firsttheswitchfromtheDec/20totheDec/21expiry,andthentheswitchfromtheDec/21totheDec/22expiry.Thebuild-upofpositionsonthefollowingDecemberexpiry(Dec/23)isalsovisiblesinceearly2020,reflectinglongertermhedgingstrategies.Atanypointintime,theDecemberexpiryofthecurrentyearrepresented50%to60%ofthetotalopenpositions.TheMarchexpiryofthecurrentyearalsoattractedsignificantvolumes,withashareoftotalpositionsgraduallyincreasingfromaround7%toalmost20%intheweeksbeforeexpiration(i.e.inFebruary).299.OnICEEndex,wheretheobservationperiodisthesecondhalfof2021,asimilarpatternisobserved.ThepositionsintheDec/21expiryrepresentedroughly50%ofthetotalpositionsatthebeginningoftheobservationperiod(June2021).TheyremainedrelativelystableuntilthemonthofOctober2021,thengraduallydecreasedtozerotowardstheendoftheyear2021.Inparallel,thepositionsinthenextDecemberexpiry(Dec/22)graduallyandsmoothlyincreased,fromaround300,000lotsinJune2021toaround450,000lotsinearly2022.ThepositionsontheDec/22expiryinearly2022wereroughlythesameasthepositionsontheDec/21expiryinJune2021,i.e.around50%ofthetotalgrosspositions.300.BesidestheDecemberexpiryofthecurrentandnextyear,whichtogetheraccountfor70%to80%ofthetotalgrosspositions,therearealsosignificantpositionsonthenexttwoDecemberexpiries(Dec/23andDec/24)aswellasontheMarchexpiries(Mar/22andMar/23).301.OnepartoftheopenpositionsonthefrontyearDecemberexpiryarerolledovertotheDecemberexpiryofthenextyear,whileanotherpartiskeptuntilexpiryandresultsinthedeliveryofthephysicalallowances(asseeninthesharpdropintheopenpositionwhenthecontractmatures,whichdoesnotcoincidewithasharpincreaseonthenextDecemberexpiry).302.Thistradingdynamicisconsistentwiththeexpectedfunctioningofthecarbonmarket:non-financialcounterpartiesgraduallybuilduptheirhedgingpositionswithlonger-datedfuturescontractstocovertheirexpectedfutureneeds,usingfirstcontractsexpiringinDecemberoftheyearY+1,thenY+2,thenY+3etc.Thehedgingneedsforthecurrentyearhavebeenbuiltupprogressivelyinthepreviousyears,hencethegrosspositionsinthefuturescontractsexpiringinDecemberofthecurrentyeartendtobeflat.Inaddition,thecalendarinaccordancewithwhichcomplianceentitiesarerequiredtosurrendertheirallowances84(i.e.30ApriloftheyearYbasedontheemissionsofthecalendaryearY-1)explainthatsignificantvolumesarealsovisibleontheMarchexpiries.84Article12(3)ofDirective2003/87/EC:Fortheperioduntil31December2020,MemberStatesshallensurethat,by30Aprileachyear,theoperatorofeachinstallationsurrendersanumberofallowances,otherthanallowancesissuedunderChapterII[aviationallowances],thatisequaltothetotalemissionsfromthatinstallationduringtheprecedingcalendaryearasverifiedinaccordancewithArticle15,andthatthoseallowancesaresubsequentlycancelled.Fortheperiodstartingfrom1January2021,MemberStatesshallensurethat,by30Aprileachyear,theoperatorofeachinstallationsurrendersanumberofallowances,100Figure73:GrosspositionsinEUAderivativesonICEEndexpercontractexpiry,inlots(sources:ICEEndex,ESMA)Figure74:GrosspositionsinEUAderivativesonEEXpercontractexpiry,inlots(sources:EEX,ESMA)thatisequaltothetotalemissionsfromthatinstallationduringtheprecedingcalendaryearasverifiedinaccordancewithArticle15,andthatthoseallowancesaresubsequentlycancelled,subjecttothereviewreferredtoinArticle28b.1014.3.7.4Numberofpositionholderspercategory303.Inthesecondhalfof2021,thenumberofentitiesholdingapositioninEUAderivativesonICEEndexrangedbetweenroughly500and700uniqueentities,withapeakabove700inSeptember2021.Therewaslittlevariationinthenumberofinvestmentfirms/creditinstitutions[90to100]andotherfinancials[around20],whilethenumberofnon-financialsandfundstendedtoincrease/decreaseinparallel(Figure75).304.OnEEX,thenumberofentitiesholdingapositioninEUAderivativeswassignificantlysmallercomparedtoICEEndex,andrangedbetweenroughly80and120uniqueentities,withapeakobservedatthesametimeasonICEEndex,i.e.inSeptember2021.Thenumberofinvestmentfirms/creditinstitutionsremainedstableuntilMarch2021(around20)thenincreasedupto40,whilethenumberofnon-financialpositionholdersincreasedinparallel.Thenumberofnon-financialentitiesremainedintherange[50-90]whilethenumberoffundswasbelow10overtheobservationperiod(Figure76).305.Inthethreemaincategoriesofcounterparties(investmentfirms/creditinstitutions,non-financialsandfunds)roughly40%ofthegrosspositionsofthecategoryareconcentratedinthehandsoffourtofivelargeentities(Figure77).306.Onaverage,thelargestinvestmentfirms/creditinstitutions,aswellasthelargestnon-financials,hadopenpositionsinaround10distinctcontractexpiries,whilethelargestfundshadopenpositionsinonly5distinctcontractexpiries(Table9).Thiscalculationwasdoneusingthetop10positionholdersineachcategory.307.Thisfindingisinlinewiththeexpectedbehaviourofthedifferenttypesofmarketparticipants:non-financialcounterpartiesarebuildingtheirhedgingportfoliosusingthedifferentcontractmaturitiesavailable,andthereforearefoundtobeactiveacrossawiderrangeofmaturitiesbeyondthemostliquidfrontyearDecemberexpiry.Funds,ontheotherhand,andespeciallysmallerones,tendtoholdpositionsmainlyinthemostliquidexpiries,i.e.theDecemberexpiriesoftheyearsYandY+1.102Figure75:NumberofpositionholdersinEUAderivativesonICEEndex,percategoryofcounterparty(ICEEndex,ESMA)Figure76:NumberofpositionholdersinEUAderivativesonEEX,percategoryofcounterparty(EEX,ESMA)103Figure77:Grosspositionsheldbythelargestpositionholdersasapercentageofthetotalpositionsofthecategory(source:ICEEndex,EEX,ESMA)Table9:Numberofdifferentmaturitiesheldbythetop10positionholdersineachcategory(source:ICEEndex,EEX,ESMA)4.3.7.5Geographicaldistributionofpositionholders308.Thegeographicaldistributionofpositionholdersvariessignificantlybasedonthetypeofcounterparty(Figure78).ThecountrycorrespondstothejurisdictionoftheLEIoftheend-positionholder,retrievedfromGLEIF.Positionsarenotaggregatedattheleveloftheparentpositionholder,andthejurisdictionoftheparententityisnotconsidered.309.ThelargestpositionsheldbyEUnon-financialfirmsareheldbyentitieslocatedinthefollowing5jurisdictions:Germany,Poland,Italy,CzechRepublicandFrance.ThepresenceoftheUnitedKingdom,SwitzerlandandSingaporeinthetop10countriesforthenon-financialscategoryismainlyexplainedbytwofactors:(1)largeenergycompanieshavingadedicatedtradingentitydomiciledinthosecountries;and(2)thepresenceoflargecommoditytradingfirms(non-complianceentities)inthosecountries.310.Onthefinancialside,banksandinvestmentsfirmsmostactiveinthemarketaresplitbetweentheEUandthirdcountriesinrelativelyhomogeneousproportions.Thetop5EUNumberofdistinctmaturitiesMinMaxAverageInvestmentfirmsorcreditinstitutions6139.3Non-financials4128.0Funds284.8Otherfinancials183.1104countriesareGermany,France,theNetherlands,PolandandSweden,andthetop5thirdcountriesaretheUS,Australia,theUnitedKingdom,CanadaandSwitzerland,indescendingorderofthetotalpositions.311.Withinthefundcategory,third-countryfundsarelargelydominantoverEUdomiciledfundsbothintermsofnumberofentitiesandintermsoftheirholdings.Third-countryfundsaremainlydomiciledintheCaymanIslands,theUS,Bermuda,JerseyandGuernsey.However,thegeographicallocationassociatedwiththeLEIofthepositionholderhaslittlerelevanceinlightoftheglobalnatureofthosemarketparticipantsandshouldthereforebeinterpretedwithcaution.IntermsofEUfunds,themaincountriesofincorporationareIrelandandLuxembourg,withacombinedshareof1.8%ofthepositionsinthefundscategory,and0.1%oftheoverallpositionsacrosscategories.Figure78:GrosspositionsinEUAderivatives-Top10countries(sources:ICEEndex,EEX,ESMA)1054.3.9AnalysisbasedondatafromtheUnionRegistry4.3.9.1DescriptionoftheUnionRegistry312.In2012theEuropeanCommissionestablishedadatabasecalledtheUnionRegistrytoensuretheaccurateaccountingofEUAsissuedundertheEUETS85.TheUnionRegistryrecords:a)TheaccountsoftheMemberStates,legalornaturalpersons,whicharenecessarytoobtainandtransfer“physical”EUAs;b)AlltransfersofEUAs("transactions")performedbyaccountholders;c)Nationalimplementationmeasures(i.e.listofinstallationscoveredbytheEUETSineachcountryandfreeallocationstoeachofthoseinstallations);d)Tablesindicatingdatesandvolumesofnationallydeterminedfreeallocations;e)AnnualverifiedCO2emissionsfrominstallationsandaircraftoperators;f)AnannualreconciliationofEUAsandverifiedemissions,whereeachcompanymusthavesurrenderedenoughEUAstocoverallitsverifiedemissions.313.ItisimportanttonotethattheUnionRegistrykeepstrackofETSallowancesonly.FinancialtransactionstakeplaceoutsidetheRegistryandonlysubsequentdeliveriesofallowancesarerecorded.314.AnessentialpartoftheUnionRegistryistheEUTransactionLog(EUTL)whichautomaticallychecks,records,andauthorisesalltransactionsthattakeplacebetweenaccountsintheRegistry.Alltransfersolderthan3yearsaremadepublicontheEUTLpublicwebsite.315.Forthepurposeofthisreport,underArticle80(3)(h)oftheRegistryRegulation86DGCLIMA,actingascentraladministratoroftheUnionRegistry,hasgrantedESMAaccesstothelastfouryearsofrecordedtransactionsintheEUTL(2018to2022)aswellastothelatestaccountbalancesofoutstandingEUAsatthebeginningof2022.316.OnekeychallengewithusingtheEUTLdatafromafinancialsupervisoryperspectivewasthelimitedavailabilityofuniversalentityidentifiersthatcanbeusedtouniquelypinpointaccountholders/legalentitiesandmatchthosewithotherdatasources.Indeed,alloftheregulatorydataanalysescarriedoutintheprevioussectionsrelyatleasttosomeextentonLEIs,whileLEIswereonlyrecentlyintroducedasarequirementtoopenanaccountintheEUETS.Tocircumventthisproblem,ESMAreliedonamatchingproceduredevelopedbytheEuropeanCommission’sJointResearchCentre(underaDGGROWmandate)87.85Seehttps://ec.europa.eu/clima/eu-action/eu-emissions-trading-system-eu-ets/union-registry_en86Until2021,theoperationalandtechnicalrequirementsoftheUnionRegistrywerespecifiedinCommissionRegulation(EU)389/2013,andfrom2021inCommissionDelegatedRegulation(EU)2019/1122(knownastheRegistryRegulation).87ThematchingprocedureinvolvestheidentificationofEUETSaccountholdersasORBISfirmsusingEUTLpublicdata.Itleveragesnationalcompanyregistrationnumbersandavalidationlogicrelyingonaccountholders’namesand/orlocationESMAstaffwouldliketothankinparticularSimonLetoutfromtheEC-JRCforhisprecioussupportandresponsiveness.Forfurtherinformationsee:JRC127805-LetoutS.,Corporatemicro-dataintheEUEmissionTradingSystem(EUETS),EUR31002EN,PublicationsOfficeoftheEuropeanUnion,Luxembourg,2022,ISBN978-92-76-48773-9(online),doi:10.2760/77710(online).106317.ThefollowingsubsectionsfocusontheanalysisoftheUnionRegistryandinparticularEUTLdata.AstheEUTLcomprisesavarietyofinstruments,includingEUAs,EUAAs,theirSwissequivalents(CHUs&CHUAs),aswellaspreviouslyusedinstrumentssuchasCertifiedEmissionReductions(CERs)andRemovalUnits(RMUs),thefollowingsubsectionsexclusivelycoverEUAswhichrepresentbyfarthelargestproportionofthemarket.4.3.9.2Analysisofoutstandingbalances318.MostallowancesareheldinOperatorHoldingAccountsandTradingAccounts.OperatorHoldingAccountsareaccountsopenedtofulfilcomplianceobligationsundertheEUETS(bycomplianceentities)whileTradingAccountscanbeopenedbyanykindofmarketparticipant(complianceornon-complianceentities)andaresubjecttomoreflexibletransferrules88.319.InJanuary2022,therewerealmost7,700OperatorHoldingAccounts(excludingaccountswithzero-balances)holdingaround33%ofoutstandingallowances.CombiningthiswiththeTradingAccountsofcompliancefirms,53%ofphysicalEUAswereheldbycomplianceentities.Another39%wereheldintheTradingAccountsofnon-complianceentities.320.TheEUTLdatafurthershowoneAllocationAccountandoneAuctionAccountwhicharebothrunbytheEuropeanCommission,andwhichrepresenttheaccountsusedtodistributenewlyissuedEUAsviafreeallocationsandauctions,respectively.Atthebeginningof2022theseaccountsheld6%ofEUAs.Furthermore,weseeafewAircraftOperatorAccountswitharound1%ofalloutstandingbalances89.88TransfersfromOperatorHoldingAccountsissubjecttoa26-hourdelayandOperatorHoldingaccountscanonlytransferallowancestootheraccountsontheirtrustedaccountlist.Newtrustedaccountscanbeaddedwithasecuritydelayofsevendays.Tradingaccountshavemoreflexibility:theyallowtransferswithoutdelaytoaccountsonthetrustedaccountlistandwitha26-hourdelaywhentransferringtoaccountsnotonthelist.89WhileAircraftOperatorspredominantlycovertheircomplianceobligationsviaEUAAstheywouldbeallowedtouseEUAsinstead.ThisensuresarbitragebetweenbothinstrumenttypesandtheEUApricereflectinganupperboundalsoforEUAAs.107Figure79:Shareofoutstandingaccountbalancesandnumberofaccounts,byaccounttypeandentityclassification.Sources:EuropeanCommission,ESMA.321.Comparingoutstandingbalancesandthenumberofaccountsperaccounttype,itbecomesapparentthatEUAsinTradingAccountsaremarkedlymoreconcentratedthaninOperatorHoldingAccounts90.Moreover,whenaggregatingbalancesatanaccountholderlevel(i.e.legalentitylevel)91,thispictureofconcentrationpersistswiththetoptenlegalentitiesholding36%ofphysicalEUAsincirculation,andthetop100entitiesholding75%.322.ConsideringonlyOperatorHoldingandTradingAccountsandclusteringtogetheraccountholderswithintheircorporategroup92wehaveidentifiedthegroups’economicsectors93.ThisapproachallowsustoobtainabroadoverviewofthecorebusinessactivitiesoffirmsholdingEUAswithoutconsideringthespecificactivitiesofthesubsidiariesholdingtheseaccounts94.Basedonthisclassification,weobservethataround40%ofEUAsincirculationarecurrentlyheldbyfinancialcompanies95.90AverageaccountbalancesinJanuary2022are:110,000EUAsperOperatorHoldingAccount,1.2mnEUAsperComplianceTradingAccount,and14.6mnEUAsperNon-ComplianceTradingAccount.91OneAccountHolder(i.e.onelegalentity)canbetheownerofmultipleOperatorHoldingandTradingAccounts.92ThereconstructionofcorporategroupswasdonerelyingontheLEIsofaccountholdersandutilisingrelationshipdatafromtheGlobalLEIFoundation(GLEIF).93UsingRefinitivEIKONeconomicsectorclassification.94E.g.,ifacommoditytradingentityisownedbyapowerproducer,weaimatclassifyingthefinancialsubsidiaryaccordingtotheirparententityasnon-financial.95However,somefinancialentitiesholdEUAsonbehalfofclientsintheirownaccounts(omnibusaccounts).DatafromtheUnionRegistryhowever,doesnotallowtodistinguishbetweenomnibusandownaccounts.-1,0002,0003,0004,0005,0006,0007,0008,0009,0000%5%10%15%20%25%30%35%40%45%AllocationAccountAuctionAccountAircraftOperatorAccount(Compliance)OperatorHoldingAccount(Compliance)TradingAccount(Compliance)TradingAccount(Non-Compliance)TradingAccount(Unclassified)AccountBalanceNumberofAccounts(rhs)108Figure80:Shareofoutstandingaccountbalancesbyeconomicsectoroftheultimateowner.Sources:EuropeanCommission,GLEIF,Refinitiv,ESMA.323.However,thepresenceofFinancialsisnotunexpectedgiventherelativeimportanceoftheEUAderivativesmarket.SincephysicalEUAsexhibitnostoragecosts,theyserveasaneffectivehedgefortheshortpositionsthatfinancialsaretakingwhensellingderivativestocomplianceentities.324.TofurtherinvestigatetherelationshipbetweenEUAaccountbalancesandderivatives,wecombinethemarketsnapshotofoutstandingEUAsfromtheEUTLwithopenfuturespositionsfromICEEndexasof4January202296.ThematchingofbothdatasetsisperformedatgrouplevelusingtheLEIsoftheultimateparentcompanieswhicharepresentinbothdatasets.325.Asaresultofthismatchingprocess,weareabletoidentifyentitiesholdingaround45%ofalloutstandingEUAsand~80%ofallopenpositionsinEUAderivativesonICEEndex.Financialsaccountforthelargestshareofmatches(32%ofEUAsand54%ofopenpositions),reflectingtheiractiveparticipationinbothphysicalandEUAderivativestrading.326.Consistentwiththeprevioussections,financialsarepredominantlytakingshortpositionsinderivativesmarkets.ComparingthenumberofshortpositionsofthosefinancialentitieswiththeirrespectivephysicalEUAholdings,wefindaclosepositiverelationship–themorephysicalEUAsareheldinafirm’saccounts,thelargerthenumberofshortpositions(depictedinFigure81asnegativevalues).Althoughthesampleonlycovers22entitiesandsomefirmsmaybemissingasaresultofthematchingprocedure,acorrelationof-67%suggestsnonethelessthatmostfinancialsarebuyingphysicalEUAswiththeplantosellthemagaininthefuture(asopposedtojuststoringthem),andthat96TheanalysisfocusesonICEEndexwherethemostliquidEUA-futuresmarketislocated.0%5%10%15%20%25%30%35%40%45%FinancialsBasicMaterialsUtilitiesEnergyN/AIndustrialsOther109mostoftheirshortpositionsarecovered(i.e.theyowntheunderlying),reducingfuturesettlementrisks.327.Theoppositepicturecanbeobservedfornon-financialfirmswithapositiverelationshipbetweenentities’physicalEUAbalancesandlongpositionsintheEUAderivativesmarket.Althoughtherelationshipiswithacorrelationof41%unequivocallypositive,thereisgreatervarianceamongstthe81firmsincludedinthesample.Thissuggeststhatnon-financials(whicharepredominantlycomplianceentitiesinthiscase)combineholdingsofphysicalEUAswithlongpositionsinEUAderivativesmarkets.TheratioofphysicalEUAstoderivativesvariestoalargedegree,presumablyreflectingidiosyncraticfactors(e.g.firmsectorandsize,organisationalstructure,businessstrategy,financialresources,accesstoderivativesmarkets,etc.).Itshouldbenotedthattheaveragesizeofbothphysicalholdingsandnetfuturespositionsaresmallerfornon-financialsthanforfinancials–whichisrelatedtodifferentconcentrationlevelsofthefinancial(highconcentration)andnon-financial(lowconcentration)sectors.Figure81:EUAaccountbalances(inmillion,horizontalaxis)andnumberofopenpositionsinEUAderivatives(inmillionEUAs,verticalaxis)inJanuary2022.Negativeandpositivevaluesontheverticalaxisindicaterespectivelynetshortandnetlongpositions.Theshadedareaindicatesthedistributionofdatapoints.Alldataatgrouplevel.Sources:EuropeanCommission,GLEIF,Refinitiv,ICEEndexdailypositionreports,ESMA.4.3.9.3Analysisoftransactions328.ThenextsectionfocusesonthetransfersofphysicalEUAsthatwereperformedbetween2018and2022andrecordedwithintheEUTL.Itcoversthefollowingtransactiontypes:a)Creation–theEuropeanCommissionissuesallEUAsbycreatingthemontheEUTotalQuantityAccount,thentransfersthemforauctioningtotheEUAuctionAccountandforfreeallocationtotheEUAllocationAccount;y=-0.6678xR²=0.9103(250)(200)(150)(100)(50)--50100150200250Financials-DerivativepositionsvsEUAsy=0.4054xR²=0.0434-1020304050-1020304050Non-financials-DerivativepositionsvsEUAs110b)Freeallocations–EUAsaretransferredfromtheEUAllocationAccounttotherespectiveOperatorHoldingAccountoffirmsentitledtoreceivefreeEUAs;c)Auctioning–EUAsare(i)transferredfromtheEUAuctionAccounttotheAuctionDeliveryAccountoftheauctionplatform,and(ii)afterbeingboughtbymarketparticipantsatanauction,theyaretransferredfromtheAuctionDeliveryAccounttothesuccessfulbidder’sTradingAccountorOperatorHoldingAccount;d)Transfers–accountholderscantransferEUAsbetweentheirownaccounts,ortootheraccountstosettletradesmadeoutsideoftheUnionRegistry;e)SurrendersorDeletions–accountholderstransferEUAsfromtheirOperatorHoldingAccountstotheEUDeletionAccounteitheraspartoftheirannualcomplianceobligation,ortobecancelledwithoutitbeingrecordedassurrendering.329.WehavecombinedthosetransactionswiththepreviouslyusedclassificationofmarketparticipantstoanalysethesupplyanddemanddynamicsinphysicalEUAs.Todoso,westartfromthesnapshotoftheoutstandingbalances(asof4January2022)providedbytheEuropeanCommissionandderiveweeklyhistoricalaccountbalancesusingthetransactiondatafromthepreviousfouryears.330.InflowsofnewphysicalEUAsinthemarketoccurintwoways.First,throughtheEUAllocationAccount,whichreceivesonceayearallowancesfromtheEUTotalQuantityAccount(notshowninthefigurebelow)andsubsequentlyreleasesthoseforfreetoOperatorHoldingAccounts(complianceaccounts).Second,throughtheEUAuctionAccountwhichcontinuouslyreceivesallowancesfromtheEUTotalQuantityAccountandevenlydistributesthosethroughtheestablishedauctioningplatformtosuccessfulbidders.Bothsourcesofinflowsarevisiblethrough(i)theabruptsurgeofcomplianceaccountsfromfreeallocations(astheEUAllocationAccountbalancesdecrease)and(ii)thecontinuousincreaseofbothcomplianceandnon-complianceaccountsoverthecalendaryearfromauctions.111Figure82:Outstandingaccountbalancesataweeklyfrequencyforcomplianceandnon-complianceentities,inmillionEUAs.CoveringOperatorHoldingandTradingAccountsforcomplianceentities,andTradingAccountsfornon-complianceentitiesrespectively.Unclassifiedaccountsareomittedforclarity.Sources:EuropeanCommission,ESMA.331.Market-outflowsofphysicalEUAsoccurinAprilofeachyearthroughthesurrenderingofEUAs,whicharetransferredfromOperatorHoldingAccounts(complianceaccounts)totheEUDeletionAccount(notshowninthefigureabove)andisvisiblethroughalargedropintheaccountbalancesofcomplianceentitiesinAprilofeachyear.332.Theimpactoffuturescontractssettlementcanalsobeobserved,withmostcontractsexpiringinDecemberandMarchofeachyear,leadingtothedeliveryofEUAsfromnon-compliancetocomplianceentities.Thismechanismisvisiblethroughthesimultaneousincreaseofcomplianceaccountbalancesanddecreaseofnon-complianceaccountbalancesaroundthosemonths.333.Inlinewiththeprinciplesofacap-and-tradesystem,marketoutflows(surrenders)outweighmarketinflows(freeallocationsandauctions)–leadingtoadecreasingnumberofphysicalEUAsincirculation.Additionally,thedeclineofcomplianceaccountbalancesappearstotakeplaceatafasterpacethanthedeclinefornon-complianceaccounts.Asaresult,duringthesecondhalfof2021,bothkindsofentitieswereholdingapproximatelyequalsharesofphysicalEUAs.334.Thisdivergencebetweencomplianceandnon-complianceaccountbalancesalsobecomesvisiblewhencomparingannualinflowsfromandoutflowstotheirrespectiveaccounts.335.Thefigurebelowshowsacomparablepatternbetweencomplianceandnon-complianceentitiesfrom2018to2020,withpositivenetflowsin2020mainlyduetotheCOVID-19relatedeconomicslowdownandlowerenergydemand.Consistently,theoverallmarket-5001,0001,5002,0002,5003,000Jan-18Apr-18Jul-18Oct-18Jan-19Apr-19Jul-19Oct-19Jan-20Apr-20Jul-20Oct-20Jan-21Apr-21Jul-21Oct-21Jan-22AllocationAccountAuctionAccountComplianceAccountsNon-ComplianceAccounts112shrankinboth2018and2019,butslightlyexpandedin2020.However,for2021wefindthatcompliancefirmsreducedtheirbalancestoanextentgreaterthaninanyoftheprevious3years,whilenon-compliancefirmsfurtherincreasedtheirholdingsofphysicalEUAs.Figure83:In-andoutflowsfromEUAaccountspercalendaryear,shownasnettransfers,inmillionEUAs.CoveringOperatorHoldingandTradingAccountsforcomplianceentities,andTradingAccountsfornon-complianceentitiesrespectively.Unclassifiedaccountsareomittedasacategorybutincludedintheoverallmarketin-andoutflows.Sources:EuropeanCommission,ESMA.4.4Conclusionofthecarbonmarketdataanalysis336.ThedataanalysisperformedabovehasevidencedthespecificitiesanduniquecharacteristicsoftheEUcarbonmarket,aswellassomeofitscomplexities.Thevariousdatasourcesusedforthisreport,includingdataontheprimarymarketanditsauctioningprocessandUnionRegistrydatatogetherwithposition,transaction,andtraderepositoriesreports,alsoillustratethechallengesofhavingacomprehensiveviewofthismarketandanin-depthunderstandingofitsdevelopments.337.Overall,ESMAconsidersthatthedataanalysishasnotunearthedanymajorabnormalityorfundamentalissueinthefunctioningoftheEUcarbonmarketfromafinancialsupervisoryperspective.ArecentreportbyOxerasimilarlyconcludedthatthemarketisfunctioningasexpected97.CarbonpricessignificantlyincreasedbetweenJanuary2018untilmid-2019andagainsinceDecember2020,withvolatilityincreasingmarginally(leavingasidetherecenteventsinUkraine).Severalfundamentalfactorshelptoexplainthis,includingthestructuraldeclineinthenumberoffreelyallocatedallowancesbuiltintothecap-and-tradesystem,interventionsbytheMarketStabilityReserve,andmore97CarbontradingintheEuropeanUnionhttps://www.oxera.com/insights/reports/carbon-trading-in-the-european-union/(500)(400)(300)(200)(100)-1002002018201920202021ComplianceNon-ComplianceMarketexpansion/shrinkage113stringentgreenhousegasemissionsreductiontargetsundertheEUFit-for-55package.TheeconomicrecoveryinEuropesincemid-2020coupledwithrisingenergyprices(includingfromgeopoliticaltensionsinlate2021)alsoledtogrowingdemandforallowances.Inthiscontext,theemergenceofnewparticipants(andinstruments)withbuy-and-holdstrategieswarrantsfuturemonitoringtotheextentthattheymayleadtoareductioninthesupplyofphysicalEUAsavailablefortrading,eventhoughtheavailableevidencesuggeststhattheirimpactisonlylimitedsofar.338.Meanwhile,basedonthemultipleregulatorydatasetscollectedandanalysedforthisreport,thevarioussegmentsoftheEUcarbonmarketappeartobroadlyfunctionasexpected.Whileprimarymarketsaresomewhatconcentrated,thelargestparticipantsarealsoactiveinsecondarymarketsandensurethatauctionedEUAsaredisseminatedtoothersecondarymarketparticipants.TradinginthesecondarymarketbetweenJune2021(whenICEmoveditsEUAtradingvenuetoAmsterdam)andDecember2021averagedEUR57billionpermonth.Mostofthetradinginthesecondarymarkettakesplacethroughderivativecontracts,whichisinpartareflectionoftheEUETScycle:complianceentitiesmustsurrenderallowancesonceayear,andmanychoosetotakelongfuturespositionswithinvestmentfirmstomakeupfortheshortfallbetweentheallowancestheymayreceiveforfreeandtheirexpectedgreenhousegasemissions,asopposedtopurchasingphysicalEUAsonthespotmarket.Fromthisperspective,largeholdingsofEUAsintheTradingAccountsofinvestmentfirmsisnotaconcernatthisjuncture,consideringthattheseholdingsappearhighlycorrelatedwiththenumberofshortpositionsthesefirmsholdinEUAderivativemarkets.339.Theanalysisoftransaction-levelandposition-leveldataonderivativemarketsconfirmsthispicture.Derivativemarketsaredominatedbycomplianceentitiesandothernon-financialsthatareholdinglongpositionsforhedgingpurposesandtradingwithinvestmentfirmsholdingshortpositionstomakeamarket.Therespectivesharesofpositionsheldbyinvestmentfirms,complianceentities,othernon-financials,investmentfundsandotherfinancialshaveremainedsteadyovertime,evenastheoverallnumberofpositionholdersincreased.Mostofthetradingvolumesconcentrateinthenext(front-year)Decemberexpiryfuturescontract,withparticipantseithertaking“physical”deliveryoftheallowanceatexpiryorrollingovertheirpositiontotheDecemberexpiryofthenextyear.TherearealsosignificantpositionsintheMarchexpiryofthecurrentyearlinkedtothelifecycleofemissionallowanceswhichhavetobesurrenderedinApril,whiletradinginlongermaturitiesremainsmarginal.Investmentfirms,creditinstitutionsandcomplianceentitiestendtotradefuturesacrossthematurityspectrum,whileinvestmentfundsandothernon-financialsectorfirmsfavourtradinginfutureswitharesidualmaturityoflessthanoneyearandareincreasinglytradinginoptions.340.Meanwhile,thecomparisonoftransactionandposition-leveldataunveilssignificanttradingactivityfromhigh-frequencytradingfirmsandmarketmakersengaginginalgorithmictrading,somefromtheUKandUS,thatarehoweveronlyholdingsmallnetpositions.341.Whilethenotionalvolumestradedinderivativemarketshavegrown,someofthisreflectstheincreaseinunderlyingEUAprices,withsimilarincreasesobservableinenergycommodityderivativemarkets,whicharesometimestradedintandemwithallowances.114Anincreaseintherelativeshareofoptionsintotalnotionalvolumestradedinlate2021isadevelopmentthatwarrantsmonitoring–asdotrendsinthelesstransparentOTCmarketsegment.342.Finally,thissectionprovidesanextensiveanalysisofthetypesandoriginsofparticipantsinEUcarbonmarkets.ThecomplexityofbringingseveralverylargedatasetsbasedondifferentpiecesofEUlegislationfrommultiplesourcescannotbeunderstated.Thiscreateschallengesintermsofidentifyingentitiesandbringingdifferentlystructureddatasetstogether,bothnecessaryprovideaconsistentpictureofthemarket.ChangesthataroseinthewakeofBrexitimpairedourabilitytomonitortradingandclearingactivitiesofthird-countryentitiesandfurtherledtoarelocationofsomemarketparticipantsintotheEUasthemaintradingvenueforEUAs(intermsofvolumes)movedfromLondontoAmsterdaminJune2021.ThesechallengesmakeitverycomplextoobtainaclearpictureofwhotradesandfromwhereandneedtobeaddressedinordertoimprovefuturemonitoringofEUcarbonmarkets.343.Despitetheseissues,andafterrecoupingthedifferentpiecesofinformation,therearenonethelessseveralimportanttakeaways.Perhapsmostimportantly,theroleofthird-countryfirmsisintricateandappearstoreflectdifferentfeaturesofthemarket.First,UK-domiciledfirmsstillundertookasignificantshareoftradinginEUAspost-Brexit,withseveral(EUandnon-EUheadquartered)financialaswellasnon-financialgroupscentralisingtheirtradingoperationsintheUK.Second,thevastmajorityofEUAtradingvolumeswereclearedwithICEUKLtd,predominantlythroughthird-countryinvestmentfirmsdomiciledintheUKortheUSactingasclearingmembers.Third,thehighshareoftradingactivity(intermsofvolumeandnumberoftrades)bysomethird-countryentitiesreflectedtosomeextentthepresenceofalgorithmictradingaswellashigh-frequencytrading.Fourth,thenumberofinvestmentfundstakingpartinthismarketishighbutvolumestradedandpositionstakenaresmallincomparisontoothermarketparticipants.Investmentfundslocatedinthirdcountriesarethelargestpositionholdersamongtheinvestmentfunds.344.Beyondthedatachallengesalreadyhighlighted,itisimportanttonotethattherearesomecaveatstothesefindings.Basedontheinformationavailable,unlesstheyareclearingtradesconcludedbyEUclients(whichremainvisiblepost-Brexit),itisnotpossibletotellwhetherthirdcountryinvestmentfirmsareactingasclearingmembersonbehalfofnon-EUclientsorclearingtheirowntransactions.SophisticatedcorporatestructuresinvolvingmultipleentitiesandLEIswithinlargegroupsfurthermuddythepicture,withintragrouptradingseeminglymakinganon-trivialshareoftotaltrading.Omnibusaccountsmanagedbyinvestmentfirmsonbehalfofclientsalsocontributetocomplexifytheoverallpicture.Inthisrespect,futureresearchwillbeessentialtodeepenourunderstandingoftheEUAsecondarymarketstructureandactivitiesofthird-countryfirms.345.ESMAhasidentifiedsomepolicyrecommendationsthatarebasedontheobservationsmadewhenassemblingthisreport.Thosetargetedpolicymeasureswouldhelpaddressingthechallengesidentified,contributetoenhancedmarketmonitoringoftheEUcarbonmarketandassistwithabetterunderstandingonhowtheEUcarbonmarketdevelops.Thosepolicyrecommendationsarefurtherdetailedinthefollowingsection.1155Policyrecommendationsandissuesforconsideration346.Aspartofthisreport,ESMAhasconsideredpotentialpolicyrecommendationsregardingtheEUcarbonmarketfromtheperspectiveofsecuritiessupervisors.Thosepolicyrecommendationsincludeproposalstoprovidetradingvenuestradingderivativesonemissionallowanceswithadditionalmonitoringtools,delivermoretransparencytomarketparticipantsandtothepublic,expandthescopeofregulatoryreportingandenhancesupervisorymarketsurveillanceofthecarbonmarket.ESMAisoftheviewthatthoserecommendationscancontributetoensuringthatthecarbonmarketcontinuestofacilitatepricediscoveryandhedgingwhileremainingfreefrommanipulationandabusivepractices,tothebenefitofallmarketparticipants.347.ESMAhasalsolookedattwootherpossiblecoursesofactiononwhichitdoesnotexpresspolicyrecommendationsbutwhichitwouldliketoraisetotheCommission’sattentionforfurtherconsideration.ThoseincludetheintroductionofpositionlimitsonderivativesonemissionallowancesandthesettingupofacentralisedmarketmonitoringoftheEUcarbonmarket.Ineachcase,theargumentsinfavourandagainstanysuchinitiativearesetout.5.1Extendedscopeofpositionmanagementcontrols5.1.1Background348.UnderArticle57(8)ofMiFIDII,tradingvenuestradingcommodityderivativesarerequiredtoapplypositionmanagementcontrols,includingpowersforthetradingvenueto:(a)monitortheopeninterestpositionsofpersons;(b)obtaininformation,includingallrelevantdocumentation,frompersonsaboutthesizeandpurposeofapositionorexposureenteredinto,informationaboutbeneficialorunderlyingowners,anyconcertarrangements,andanyrelatedassetsorliabilitiesintheunderlyingmarket,including,whereappropriate,positionsheldincommodityderivativesthatarebasedonthesameunderlyingandthatsharethesamecharacteristicsonothertradingvenuesandineconomicallyequivalentOTCcontractsthroughmembersandparticipants;(c)requestapersontoterminateorreduceaposition,onatemporaryorpermanentbasis,andtounilaterallytakeactiontoensuretheterminationorreductionofthepositionwherethepersondoesnotcomplywithsuchrequest;and(d)requireapersontoprovide,onatemporarybasis,liquiditybackintothemarketatanagreedpriceandvolumewiththeexpressintentofmitigatingtheeffectsofalargeordominantposition.116349.TheRecoveryPackageforcommodityderivatives98mandatedESMAtodevelopdraftRTStospecifythecontentofpositionmanagementcontrols.Initsfinalreportontechnicalstandardsforcommodityderivatives99submittedtotheEuropeanCommissionon19November2021,ESMAsuggestedthat,aspartoftheirpositionmanagementcontrols,tradingvenuesshouldberequiredtohavearrangementsinplacefortheongoingmonitoringofpositionsheldbyendpositionholdersandparentundertakingsineachcommodityderivativetradedontheirtradingvenue.Becausephysicallysettledcommodityderivatives,aremoresusceptibletodisorderlytradingpractices,underESMA’sproposals,tradingvenuesshouldalsoberequiredtosetaccountabilitylevelsforeachphysicallysettledcontracttradedontheirvenue.Accountabilitylevelsarenothardlimitsbutareintendedtoactasatriggeralarmforthetradingvenuewhenalargepositionisbeingaccumulated.350.Asderivativesonemissionallowancesdonotqualifyascommodityderivatives,positionmanagementcontrolscurrentlydonotapplytotradingvenuestradingemissionallowancederivatives.5.1.2Recommendations351.ESMArecommendsextendingtherequirementsforpositionmanagementcontrols,includingtherequirementssetoutinthedraftRTSonpositionmanagementcontrols,totradingvenuestradingderivativesonemissionallowances.ThiswouldrequireamendingArticle57(8)ofMiFIDII(andthedraftonpositionmanagementcontrols).5.1.3Impactandregulatorygoal352.Thevariouspiecesofdataanalysisshowthatthecarbonmarketisamarketinfluxwhich,inaddition,isuniqueinitsdesign.ESMAconsidersthatpositionmanagementcontrolsarewellsuitedtoaddanotherlevelofsurveillancetothemarketwhichwouldhelpinmaintainingorderlymarkets.353.Positionmanagementcontrolsaimataddressingthespecificchallengesarisingfromcommodityderivativetradingandsupplementthemoregeneralobligationforalltradingvenuestoensurefairandorderlymarkets.Theextensionofpositionmanagementcontrols,includingtheonessetoutinthedraftRTSonpositionmanagementcontrols,totradingvenuestradingderivativesonemissionallowanceswillrequirethosetradingvenuestointroduceadditionalmarketsurveillancetools,particularlysettingaccountabilitylevels.Positionmanagementcontrolsmayalsoincentivisetradingvenuestradingderivativesonemissionallowancestomorefrequentlyassesstheneedtoobtainadditionalinformationfrommarketparticipantsastothenatureandpurposeofthepositionsheld,whileretainingdiscretionastothefollow-upactionsthatmaybebasedonavailableinformation.ESMAthereforeconsidersthatextendingpositionmanagementcontrolstoderivativesonemissionallowanceswouldenhancemarketoversightinthose98Directive(EU)2021/338oftheEuropeanParliamentandoftheCouncilof16February2021amendingDirective2014/65/EUasregardsinformationrequirements,productgovernanceandpositionlimits,andDirectives2013/36/EUand(EU)2019/878asregardstheirapplicationtoinvestmentfirms,tohelptherecoveryfromtheCOVID-19crisis99https://www.esma.europa.eu/sites/default/files/library/esma70-156-4710_final_report_technical_standards_for_commodity_derivatives.pdf117instrumentsandcontributetoanevenbetterunderstandingbytradingvenuesoftradingpatternsontheirmarkets.5.2Clarificationofpositionreportinginemissionallowances5.2.1Background354.UnderArticle58(1)ofMiFIDII,tradingvenuestradingcommodityderivatives,emissionallowancesandderivativesthereofmust(1)makepublicaweeklyreportwiththeaggregatepositionsheldbythedifferentcategoriesofcounterpartiesand(2)providethecompetentauthoritywithacompletebreakdownofthepositionsheldbyallpersonsonthattradingvenue,atleastonadailybasis.355.WhilsttheLevel1textsetsoutthatdailypositionsinemissionallowances,andnotonlyinderivativesonemissionallowances,shouldbereportedtotheNCA,someothertermsusedinArticle58(1),suchasopenposition,longandshortpositions,whichtypicallyapplytoderivativesratherthanspotinstruments,appeartohavecreateduncertaintyonhowpositionsonspotemissionallowancesshouldbereported.ESMAnotesthatthedailypositionreportsreceivedfromNCAsinthecontextofthisreportandtheEUcarbonmarketanalysisperformeddidnotincludeanypositionreportsinemissionallowances.356.ESMAalsonotesthatinaccordancewiththemandatereceivedunderArticle57(12)ofMiFIDII,Article6ofRTS21(andRTS21a)setsoutcriteriafordeterminingwhetheracommodityderivativecontractisaneconomicallyequivalentOTCcontracttothattradedonatradingvenueforpositionlimitpurposes.NosuchdefinitionishoweverprovidedforEEOTCderivativesonemissionallowancesforpositionreportingpurposes.5.2.2Recommendation357.ESMAisoftheviewthatthepositionreportingregimesetoutinMiFIDIIdoesnotserveitsintendedpurposewhenitcomestopositionreportinginemissionallowances.Positionreportinginderivativeinstrumentsallowstheregulatorstomonitortheevolutionandinparticularthebuild-upofpositionsovertime,anditspossibleeffectonboththederivativesandtheunderlyingspotmarket.However,thesameoutcomecannotbereachedasregardsspotinstruments,suchasemissionallowances,wherepositionsinthecontractremainopenforaveryshortperiod.ApositionthatreachesmaturityisreportedbythetradingvenuetotheNCAas“zero”,whichmeansthatforemissionallowances,theNCAwillreceivea“zero”reporteveryotherdaywhenthetransactionisfinallysettledandtheemissionallowanceisdelivered.Thesameholdstruefordailyfutures.NomeaningfulinformationcanthereforebedrawnfromthosepositionreportsbytheNCAonthenumberofemissionallowancesheldbymarketparticipantsformarketmonitoringpurposes.Furthermore,noinformationisavailabletotheNCAofthespottradingvenueontheemissionallowancesthathavebeenfreelyallocated,auctionedintheprimarymarketorsurrendered.Consideringtheabove,ESMAisoftheviewthatthedataalreadyavailableintheUnionRegistry,whichrecordstheholdingsofbothfinancialandnon-financialentities.wouldbeamorerelevantandexhaustivesourceofinformationonemissionallowanceaccountholders.118358.However,ESMAalsonotesthattheUnionRegistryRegulationcurrentlyallowsforomnibusaccountswhichdonotpermittheidentificationofindividualholders.Inadditiontotherecommendationsetoutinsection5.8,ESMAthereforerecommendsthattheUnionRegistryRegulationshouldbeamendedinawaythatallowsfortheidentificationofultimatebeneficialownersofemissionallowancessothattheUnionRegistrydatacanvaluablybeusedbyNCAsfortheexerciseoftheirmarketmonitoringresponsibilities.Inparallel,ESMArecommendsremovingthepositionreportinginemissionallowancesandweeklypositionreportingrequirementsfromMiFIDII.359.AsregardsEEOTCderivativesonemissionallowances,ESMAstandsreadytoprovidetechnicalassistancetotheCommissionshouldtheCommissionconsiderthatfurtherclarificationinLevel2isneeded.5.2.3Impactandregulatorygoal360.ESMAisoftheviewthat,basedontheaboveamendments,EUApositionreportscanbeasourceofusefuladditionalinformationforNCAsintheexerciseoftheirmarketmonitoringresponsibilitiesandcannotablyhelpidentifyingthepotentialexistence,orbuilding,oflargepositionsinemissionallowancesbyamarketparticipantwhichmaybeasourceofconcernorraisequestionmarks.Additionalinformationonthepositionsheldbymarketparticipantsinemissionallowancesovertimewillbeofparticularrelevanceconsideringthelimitednumberofparticipantsintheprimarymarketasexplainedinsection4.3.3,notingthattheUnionregistrycannotbereliedupontothatendduetotheuseofomnibusaccounts.Moregenerally,ESMAconsidersthatemissionallowancepositiondatawillcontributetoabetterunderstandingoftheEUcarbonmarketdynamicsandmarketparticipants’tradingstrategies.361.Asfurtherexplainedbelow,ESMAalsobelievesthatthecarbonmarketisofgreatinteresttothewiderpublicandisoftheviewthatmoreinformationshouldbeprovidedtothepublicnotonlyonemissionallowancederivativesbutalsoonemissionallowances.Clarificationofpositionreportsinemissionallowancesasrecommendedaboveshouldbeafurtherstepinthatdirection.362.Lastly,furtherclarityonthedefinitionofEEOTCderivativesonemissionallowancesmaycontributetoamorecomprehensivepositionreportingofemissionallowancederivatives,althoughESMAnotesthattheEEOTCreportingobligationonlyapplieswhenthepositionresultsfromatransactioninvolvinganinvestmentfirm.5.3Improvedgranularityandconsistencyofweeklypositionreports5.3.1Background363.Asexplainedinsection4.3.6.1,weeklypositionreportsonemissionallowancederivativespublishedbytradingvenuesincludeandcombineopenpositionsinfuturesonemissionallowancesandoptionsonfuturesonemissionallowancesonadeltaadjustedbasis,evenwhentheoptionandthefuturecontractshaveadifferentvenueproductcode.Thecombinationofopenpositionsheldinfuturesonemissionallowances119andoptionsonemissionallowancefuturesonadeltaadjustedbasisprovidesausefulviewofthetotalexposureacategoryofcounterpartiesmayhavetoemissionallowances.364.ESMAishoweverawareofcallsformoregranularityinthoseweeklypositionreportswhichwouldrepresentausefulsourceofinformationformarketparticipants.365.ESMAalsonotesthatthecategoriesofcounterpartiesforthepurposeoftheweeklypositionreportsaredefinedinArticle58(4)ofMiFIDIIasfollows:(a)investmentfirmsorcreditinstitutions;(b)investmentfunds,eitheranundertakingforcollectiveinvestmentsintransferablesecurities(UCITS)asdefinedinDirective2009/65/EC,oranalternativeinvestmentfundmanagerasdefinedinDirective2011/61/EC;(c)otherfinancialinstitutions,includinginsuranceundertakingsandreinsuranceundertakingsasdefinedinDirective2009/138/EC,andinstitutionsforoccupationalretirementprovisionasdefinedinDirective2003/41/EC;(d)commercialundertakings;(e)inthecaseofemissionallowancesorderivativesthereof,operatorswithcomplianceobligationsunderDirective2003/87/EC.366.However,andasexplainedinsection4.3.2,inthecourseofpreparingthepreliminaryreport,ESMAhadbeenmadeawareofdifficultiesandinconsistenciesintheclassificationofcounterpartiesintheweeklypositionreports.Therelevanceandqualityofdataanalysisbasedonweeklypositionreportsisbeingaffectedbythereclassificationofmarketparticipantsacrossthedifferentcategoriesofcounterpartiesovertimeaswellbyremaininguncertaintiesabouttheclassificationofcertaincounterparties.5.3.2Recommendations367.ESMAhasidentifiedtwocoursesofactionswithregardtoweeklypositionreports.5.3.2.1Moregranularityinweeklypositionreports368.ESMAnotesthatintheUS,theCFTCrequirestradingvenuestradingcommodityderivativestopublishtwosetsofCommitmentofTraders(CoT)reportson:1)combinedopenpositionsinfuturesandoptionsonfuturesonadeltaadjustedbasisand2)openpositionsinfuturesonly.369.ESMArecommendshavingasimilarapproachintheEUandrequiringtradingvenuestoalsopublishweeklypositionreportsonopenpositionsinfuturesonemissionallowancesonlyinadditiontothecurrentcombinedreport.ThiswouldrequireamendingArticle58(1)(a)ofMiFIDII,Article83ofDelegatedRegulation(EU)2017/565andITS4.120370.ESMAwouldalsoseebenefitsinextendingthisincreasedtransparencyinweeklypositionreportstoallcommodityderivatives.5.3.2.2Additionalguidanceoncounterpartyclassification371.Aspartofthemorein-depthanalysisconductedofcurrentcounterpartyclassificationforweeklypositionreports,ESMAhasidentifiedtwomainissuesThefirstonerelatestotheclassificationoffunds,notablyfromthirdcountries.Thesecondonerelatestothecategory“othernon-financials”thatappearstoincludeseveralentitiesthatshouldinsteadbeclassifiedas“complianceentities”.372.ESMAhasalreadyproducedaQ&A(seeQ&A22underPositionReporting)100tofurtherassistmarketparticipantswithcounterpartyclassificationbut,basedontheanalysisabove,appreciatesthatmoreclarityisstillneededinthisarea.SuchfurtherclarificationcouldbeprovidedinLevel2.373.Intheshorterterm,andasafollow-uptothisreport,ESMAcommitstoworkonadditionalguidanceoncounterpartyclassification.ESMAnotesinparticularthatArticle58(4)ofMiFIDIIcross-referstodefinitionswhicharerelevantforEUentities.However,non-EUentitiesarealsoactiveintheEUcarbonmarketandneedtobeclassifiedintheweeklypositionreportsinaconsistentway.ESMAconsidersthatfortransparencypurposes,non-EUentitiesshouldbecategorisedinthesamewayastheywouldbecategorisediftheywereestablishedintheEUandsubjecttoEUlaw.5.3.3Impactandregulatorygoal374.ESMAappreciatesthatthemajorityofthesourceswhicharethebasisofthedataanalysisinSection4stemfromregulatoryreporting.TheEUcarbonmarketbyitsdesignisofgreatrelevanceandinterestalsotothewiderpublicandESMAbelievesthatthereismeritinprovidingmoregranularinformationabouttheEUmarkettothepublic.Thetwo-wayprovisionofweeklypositionreportsassuggestedabovewouldbeonestepinthatdirection.375.Providingmoretransparencytothemarketonpositionsheldinoptionsonfuturesonemissionwillcontributetobetterunderstandingthestrategiesofthevariouscategoriesofcounterpartiesandhelpidentifypotentiallyemergingtradingpatternsormarkettrends.376.Inaddition,ESMAconsidersthatmarketparticipantsandthewiderpublicalikewouldbenefitfromamorerobustandreliablecounterpartyclassificationinpositionreportswhichwouldimprovethequalityoftheweeklypositionreportspublished.100https://www.esma.europa.eu/sites/default/files/library/esma70-872942901-36_qas_commodity_derivatives.pdf1215.4Refinedtransparencycalibrations5.4.1Background377.UnderMiFIR,thescopeofinstrumentscoveredbypre-andpost-tradetransparencyandtransactionreportingarecloselyaligned.Thegapsorinconsistenciesidentifiedintransactionreportingwithregardstospotemissionallowancesorderivativesonemissionallowancesinsection5.6arethereforealsorelevantwithregardtomarkettransparency.378.MiFIRprovidesforwaiversfrompre-andpost-tradetransparencythatarebasedontheliquidityoftheinstrumentandsizeoftheorder/transactionasfurtherspecifiedinRTS2fornon-equityinstruments.Intheconsultationpaperpublishedon9July2021,ESMAsetoutproposalsforreviewing,whereappropriate,theLargeinScale(LIS)andSizeSpecifictotheInstrument(SSTI)thresholdsforcommodityderivatives,emissionallowancesandderivativesonemissionallowancesandiscurrentlyconsideringhowtobestfollow-uponthoseproposals.5.4.2Recommendations379.ESMAisfollowingupontheworkinitiatedinthecontextoftheMiFIDII/MiFIRreviewreportonthetransparencyregimefornon-equityinstruments,includingemissionallowancesandderivativesonemissionallowances,setoutinRTS2.ESMAhowevernotesthatspotemissionallowancesandEUAderivativesarecurrentlyconsideredtobeliquidinstrumentsandthatforsuchliquidinstrumentstheLargeinScale(LIS)andSizeSpecificTotheInstrument(SSTI)thresholdsarethereforecriticalfordeterminingwhetherpre-tradetransparencywillbeavailabletomarketparticipantsorwhetherthetradingvenuemayoperateunderapre-tradetransparencywaiver.Thosethresholdsarealsomaterialindeterminingwhetherposttradetransparencywillberealtimeormaybedeferredtakingintoaccounttheriskstowhichmarketparticipantsareexposed.ESMAalsonotesthatinitsproposalforaMiFIRreview,theCommissionsuggestsdeletingtheSSTIwaiveranddeferral.Goingforward,ESMAwillthereforeconsiderthepotentialneedforrecalibrationoftransparencythresholdsforemissionallowancesandemissionallowancederivatives.WhilethemoredetailedproposalsforthereviewofRTS2havenotyetbeenfinalised,ESMArecommendsthat,oncefinalised,thoseproposalsshouldbeswiftlyadoptedbytheCommissiontoensureanappropriateleveloftransparencyinthemarket.5.4.3Impactandregulatorygoal380.Inconsideringareaswherefurthertransparency,ormorerefinedtransparency,couldbeprovidedontheEUcarbonmarket,inadditiontoweeklypositionreports,ESMAremainsmindfuloftheoverallbenefitsthattransparencybringstothemarket,improvingitsefficientandorderlyfunctioningandultimatelycontributingtofinancialstability.Appropriatelycalibratedmarkettransparency,thatalsotakesintoaccountthepotentialmarketrisksfacedbymarketparticipantstradinginlargesizes,reducesinformation122asymmetries,allowsmarketparticipantstomakemoreinformeddecisionsandtherebyincreasestheefficiencyofthepriceformationprocess.5.5IncreasedtransparencyandreportingofOTCtransactions5.5.1Background381.ESMAhasidentifiedtwokeyissuesthatsignificantlylimitregulators’visibilityoftradingactivitiesinOTCemissionallowancesandderivativesthereof.ThefirstissuerelatestothelackofreportingofOTCtransactionsinspotemissionallowances(sub-section5.5.1.1)andthesecondoneconcernsthelackofreportingofOTCtransactionsinderivatives(sub-section5.5.1.2).382.ThediagrambelowillustrateswhereESMAhasidentifiedreportingandtransparencygaps.5.5.1.1OTCtransactionsinspotemissionallowances383.TheESMApreliminaryreportthatwaspublishedinNovemberhighlightedthelimitationoflackofreportsonOTCtransactionsinspotemissionallowances.TheissueseemedtobepurelyofalegalnatureduetothescopeofArticle26(2)ofMiFIR,whichlimitsreportingtoOTCtransactionsinspotinstrumentsthatareconsideredhavingthesamecharacteristics(e.g.ISIN)astheonesthatareexecutedontradingvenues(theso-calledToTVinstruments).AsitappearedthatspotemissionallowanceswerenottradedonanyofthethreeEuropeantradingvenues,OTCtransactionsinspotemissionallowancescouldnotfallunderthescopeofMiFIRtransactionreportingduetothelackofvenuetradingintheseinstruments.384.Furthertosubsequentinvestigations,ESMAhasobservedthatinfactsomeofthefinancialinstrumentstradedonEEXarereportedas“spotemissionallowances”and,123therefore,venuetradingintheseinstrumentsdoesoccur.However,theISINreportedforthoseinstrumentshasa“DE”prefixanddoesnotcorrespondtothe“EU”ISINassignedtothespotemissionallowancesintheISINGuidelines101thatisdisplayedontheECwebsite102,thisEUISINmightbesubsequentlytradedOTC.Consequently,anyOTCtransactioninaspotemissionallowancehavingthesameISINastheoneadvertisedontheECwebsiteisnotreportedunderMiFIR.385.Inaddition,theDEISINassignedatthetimeoftheauctionoftheemissionallowanceonEEXprimarymarketisdifferentfromtheDEISINassignedtothespotallowancesthatEEXadmitsfortradingonthesecondarymarkets.Therefore,reportingentitiesmightnotreportanOTCtransactioninaspotemissionallowancewithaDEISINbecauseitisunclearwhichDEISINshouldbeusedfordeterminingthereportabilityofthetransactiononthebasisoftheToTVconcept:(a)theDEISINusedatthetimeoftheauctionor(b)theDEISINassignedtothespotcontractadmittedtotradingonthesecondarymarket.ThisissueaffectstheconsistencyoftheMiFIRtransactiondatareported.5.5.1.2OTCtransactionsinderivativesonemissionallowances386.Furthertosubsequentinvestigations,ESMAhasidentifiedadifferenceinthewaytradingvenuesrefertoandreportEUAswhichhaveaveryshortdeliverydate(expiryupto2days).Asillustratedintheabovesection,EEXreferstothoseinstrumentsas“Spot(dailyexpiry)”andreportsthemtoESMAundertheclassificationofspot“EmissionAllowances”.ICEEndexandNasdaqrefertothoseinstrumentsas“DailyFutures”andreportthemtoESMAundertheclassificationof“DerivativesonEmissionAllowances”.387.OTCtransactionsinderivativeinstrumentswithanexpiryofupto2daysthatareofferedonICEEndexandNasdaqarenotreportedbecausetheyarenotconsideredToTV.Giventhatthesecontractshaveashortexpiry,theyarereportedwithadifferentISINeachday.DuetothenarrowapplicationoftheToTVconcept,whichisbasedonhavingthesameISINfortheequivalentinstrumenttradedOTC,OTCtransactionsintheseinstrumentsareequallynotreportedunderMiFIR.388.Finally,giventhattheinstrumentswithdailyexpirythatareofferedonICEEndexandNasdaqarereportedasaderivativeinstrument,theycouldstillbeconsideredasfallingwithinthescopeofthetransactionreportingobligationduetotheunderlyingemissionallowancebeingtradedonatradingvenue.However,alsointhiscase,theOTCtransactionsintheequivalentinstrumentsarenotreportedbecausetheISINreportedintheunderlyingfieldfortheseinstrumentsistheISINwiththeEUprefixandthusitisnotthesameastheDEISINreportedbyEEXwhenadmittingthespotemissionallowanceonthesecondarymarket.Nevertheless,evenifwithsomelimitations,additional101Page13,point3.8oftheISINUNIFORMGUIDELINESRELATINGTOISO6166(9thedition):MicrosoftWord-5_1_ISINGuidelinesVersion19_Nov2021_Draft_Cleanversion.docx(anna-web.org)102https://ec.europa.eu/clima/eu-action/eu-emissions-trading-system-eu-ets/ensuring-integrity-european-carbon-market/isins-eu-ets-emission-allowances_fr124informationonOTCtransactionsisavailableintheUnionRegistry(seepara398)103andinEMIRreports(seeparas229and245)104.389.WhileESMAappreciatesthatOTCtransactionsarelikelytobelimitedwhenmeasuredagainsttheoverallmarket,theseissuesraiseconcerns,ascontractswhichareessentiallyidenticalinnatureareclassifiedasdifferenttypesoffinancialinstrumentsandreportedassuchbytradingvenues.Thisaffectstheconsistentapplicationofvaryingreporting(MiFIR/EMIR)andtransparencyobligations(MiFIR),whichmeansthattheresultingdatacollected/publishedundertheseobligationsmaybeskewedand/orsubjecttodifferentreportingandtransparencycalculationrequirements.390.ItisimportanttohighlightthatArticles7and10ofCommissionDelegatedRegulation(EU)2017/565setoutthedistinctionbetweenaspotcontractandaderivativecontractasregardsMiFIDIIAnnexSectionC(7)instrumentsandtoC(4)currencyderivativesrespectively.Article7ofCommissionDelegatedRegulation(EU)2017/565,whichclarifiesthescopeofcommodityderivativescoveredbyC(7)notablyprovidesthataspotcontractisdefinedasa“contractforthesaleofacommodity,assetorright,underthetermsofwhichdeliveryisscheduledtobemadewithinthelongerofthefollowingperiods:(a)2tradingdaysand(b)theperiodgenerallyacceptedinthemarketforthatcommodity,assetorrightasthestandarddeliveryperiod.5.5.1.3Summaryofinconsistencies391.ThetablebelowprovidesasummaryoftheinconsistenciesfoundintheISINcodes,instrumentclassificationcodesaswellasothercharacteristicsreportedtoESMAonEUAswithveryshortdeliverydate.103Since2021,allentitieshavetoreportifthetransactionsinemissionallowanceswerepurelybilateral,namelyinvolvedonlythebuyerandthesellerwhicharebothnon-financialentities.However,thedataretrievedfromtheregistrywaspartialbecause(1)theOTCbilateraltransactionindicatorisnotprovidedfornearly46%ofalltransactionsincludedintheregistryand(2)itisdifficulttoassesshowmanyofthosebilateraltransactionsreflectintragrouptrades.104EMIRdatareportedpost-BrexitisnotcompleteduetothelackofreportingoftradeswherecounterpartiesareUKbased.125Table10.Summaryoftheinconsistencies5.5.2Recommendations5.5.2.1Shortterm:potentialguidanceondefinitionofspotEUAsandISINreporting392.ESMAintendstoaddressbothissuesidentifiedintheprevioussectionsinstages.First,concerningtheuseofmultipleISINswith“DE”prefixtoidentifythesamespotemissionallowancesthataredisplayedontheECwebsite105withthe“EU”prefix,ESMAintendstoprovideguidancetoensurethatonly“EU”ISINsareusedforthepurposeofreporting.SuchguidancewouldensurethatOTCtransactionsininstrumentswithashortexpirylistedonallthreeEuropeanvenuesarereportedunderMiFIRArticle26.393.Second,concerningthedefinitionofspotEUAs,itshouldbenotedthat,whilethedefinitionof‘spotcontract’assetoutintheCDR(EU)2017/565,pursuanttoArticles7(2)and10(2),appliesto‘commodities’,thereisnospecificlegaldefinitiontodistinguishEUAspotcontractsfromEUAderivativesbeyondthehigh-levelwordingcontainedinMiFIDII.GiventheabsenceofanexplicitlegaldefinitiontodistinguishEUAspotcontractsfromEUAderivativesandthesmallproportionofvenuetradingininstrumentswithshortexpiry(0.4%oftradesrepresenting4.6%ofvolumesbought)comparedtotheoverallvenuetrading,ESMArecommendsprovidingfurtherguidanceonthedefinitionofspotEUAs.SuchguidancewouldensurethattheinstrumentswithshortexpirylistedonICEandNASDAQaresubjecttothesametransparencyrequirementsastheonetradedonEEX,therebyensuringalevelplayingfieldamongthesevenues.ESMAintendstoreflect105https://ec.europa.eu/clima/eu-action/eu-emissions-trading-system-eu-ets/ensuring-integrity-european-carbon-market/isins-eu-ets-emission-allowances_fr126togetherwiththeEContheappropriatelegaltooltoaddressthisissueintheshorttermwhile,inthemediumterm,therelevantlevel2measures106shouldbefurtheramended.5.5.2.2Longterm:reviewMiFIRscopeoftransparencyandregulatoryreporting394.In2021ESMAanalysed107thefunctioningoftheTradedonaTradingVenue(ToTV)conceptasabasisfordefiningthescopeofOTCderivativessubjecttotransparencyandreporting.Inthiscontext,ESMAprovidedpolicyrecommendationsthatarealsovalidfortheEUAderivativesmarket.ThisconceptnarrowlydeterminesthescopeofOTCderivativesthataresubjecttothetransactionreportingandtransparencyobligationsunderMiFIR,leavingNCAswithlimitedvisibilityonthismarket.395.InthecontextofthisreportonthefunctioningoftheemissionallowancesmarketsandconsideringthelackofvisibilityoftheOTCmarketforEUAs,ESMAwouldliketoreiteratetheneedtoincreasethetransparencywiththeremovaloftheToTVconcept.ThismethodwouldalsosimplifythereportingforentitiesbyremovingtheneedtoimplementcomplexcheckstobeperformedattransactionleveltoassesswhetheranOTCderivativeisconsideredToTVandthussubjecttotransparencyandreporting.5.5.3Impactandregulatorygoal396.TheissuesidentifiedbyESMAaffecttheconsistencyoftheMiFIRregulatoryreportsandtransparencypublicationsbydifferentmarketparticipants.DuetothelackofclarityconcerningthedefinitionofspotEUAs,thescopeofToTVaswellastheISINstobeusedforreporting,theapplicationoftransparencyandreportingobligationsislefttothediscretionofthereportingentities.Theresultingdatapublishedandreportedmaybeeithermissingelementsorskewed.Forexample,thesameEUAbasedinstrumentreportedbydifferentmarketparticipantsmightnotbegroupedinthesameliquidityclassforthepurposesofthetransparencycalculation.397.Inaddition,thesameEUAsandrelatedderivativesaretreateddifferentlyunderMiFIRandotherapplicablesectoralacts(e.g.EMIR)andthereforesubjecttovaryingreportingandtransparencyrequirementsdependingonhowtheyarereportedbymarketparticipants.Forexample,theEMIRreportingscopecoversonlyderivativecontracts,thustheinconsistentqualificationofthesametypeofinstrumentseitherasaderivativeorasspot,wouldresultinsomepartialreportingtotheTradeRepositoriesunderEMIR.AsfortheMiFIRreportingscope,thiscoversToTVinstrumentsandderivativesthereof,sotheissuesidentifiedbyESMAinthissectionequallyresultinpartial/inconsistentreportingtotheNCAs.398.Intermsofoverallimpact,whileESMAisnotinapositiontofullyassessthescaleofOTCtradinginEUAsthatismissinginMiFIRtransactiondataduetotheissuesidentified106CommissionDelegatedRegulation(EU)2017/565settingoutthedistinctionbetweenaspotcontractandaderivativecontract.107Section5.2intheMiFIRreviewreportontheobligationstoreporttransactionsandreferencedatahttps://www.esma.europa.eu/sites/default/files/library/esma74-362-1013_final_report_mifir_review_-_data_reporting.pdf127inthissection,thepartialdata108retrievedfromtheUnionRegistryindicatesthattheproportionofOTCtransactionsrecordedintheregistryissignificanthoweveritmayalsoincludeintragroupaccounttransfers.Forthesereasons,ESMAconsidersthattheproposedrecommendationsincludedinthissectionwillcontributetomoreeffectivemonitoringoftheOTCmarketswhileprovidingcomplete,consistentandreliabletransparencydatatotheendinvestors.5.6TrackingchainoftransactionsinMiFIRregulatoryreports5.6.1Background399.AshighlightedinthesectionillustratingtheanalysisofMiFIRtransactiondata,theprocessofde-duplicatingtransactiondatacanberatherchallengingwhentheorderexecutedonthevenueisaggregatedforseveralclientsorwhenforthesametransactionmultiplereportingchainsofintermediariesareinvolved.Thisisduetotheincorrectuseorabsenceofsomeidentifiersthatwouldfacilitatereconstructingthehistoryoftradingpatternschainsanddeduplicatethetransactionreportsforcarryingoutquantitativeanalysis.5.6.2Recommendation400.TheexperiencegainedfromtheanalysisofMiFIRtransactiondataprovidesfurtherevidencetosupporttheESMArecommendationpresentedinsection6oftheMiFiRReviewReportpublishedinMarch2021109.Thereporthighlightstheimportanceofincludinganewidentifierinthecaseofgroupingorders110,whichshouldbegeneratedandreportedbyeachexecutingentitythatisgroupingordersforitsclientsandshouldbeuniqueforthemarket-sideandclient-sidereportsoftheexecutingentity.Inaddition,thereportrecommendsincludingexplicitobligationsforreportingentitiestoobtainthesametradingvenueexecution(TVTIC)codethatwasassignedbythetradingvenuestobothsidesofthetradeasprescribedinRTS24.5.6.3Impactandregulatorygoal401.ESMAwouldliketoensuremaintainingaconsistentlyhighlevelofmarketsurveillanceandintegrityfortheEUAmarket.Tothatend,theTVTICcodethatwasassignedbythetradingvenuetobothsidesofthetradecouldbeusedmoreeffectivelyifcombinedwiththeproposednewcodeforidentifyingthecorrespondingclientallocationsincaseswheretheorderexecutedonthevenueisaggregatedforseveralclients.402.Thesecodeswillensurethatclient-sidereportsandmarketsidereportspertainingtothesametransactionarenotdoublecountedandwillenableregulatorstotracethemarket108Partialbecause(1)theOTCbilateraltransactionindicatorisnotprovidedfornearly46%ofalltransactionsincludedintheregistryand(2)itisdifficulttoassesshowmanyofthosebilateraltransactionsreflectintragrouptrades.109esma74-362-1013_final_report_mifir_review_-_data_reporting.pdf(europa.eu)110Asdefinedinchapter5.23oftheESMAguidelines:https://www.esma.europa.eu/sites/default/files/library/2016-1452_guidelines_mifid_ii_transaction_reporting.pdf.128executiontotheclientallocationmoreaccurately,includingwhereordersareaggregatedandresultintheexecutionofatransactionforthebenefitofseveralclients.5.7ESMAaccesstoprimarymarketstransactions5.7.1Background403.AccordingtoArticle36oftheAuctioningRegulation,theauctionplatformmustreporttothecompetentnationalauthorityunderMiFID111completeandaccuratedetailsofeverytransactionexecutedontheauctionplatformthatresultsinthetransferofemissionallowancestothesuccessfulbidders.ThereportmustincludealltherelevantdetailsusingthedatastandardsandformatsrequiredundertherelevantMiFIRtechnicalstandardsontransactionreporting112.404.ReportingunderArticle36AuctioningRegulationislimitedtothebuysideofthetransaction,whichmeansthatEEXwillreportonlythepurchase(biddervs.CCP),whilethesellside(memberstatevs.CCP)isnotreported.SinceArticle36oftheAuctioningRegulationcontainsaspecialruleforreportingoftransactionsonaprimarymarketauction,thereisnoseparatereportingobligationunderArticle26ofMiFIRforbiddersthatareauthorisedasinvestmentfirms.5.7.2Recommendation405.Secondarymarkettradinginemissionallowancesandrelatedderivativesishighlyinterconnectedwiththeprimarymarketsduetotheprogressivelylimitedsupplyofemissionallowancessubjecttoauctionsandtheobligationforcomplianceentitiestosurrenderemissionallowancesbasedonthetotalemissionsofthepreviousyear(seesection4.2.3aboveforfurtherdetails).Giventhattheinformationonprimarymarketactivityisessentialfortheeffectivemonitoringofthesemarkets,ESMAisoftheviewthattheEUAuctionRegulationshouldbeamendedfurthertoensurethattherelevantcompetentauthorityaswellasESMAalsoreceivestheinformationonprimarymarketstransactionsinlinewiththeamendmentsintroducedinArticle26ofMiFIR,followingtheESAreview113.5.7.3Impactandregulatorygoal406.Asoutlinedinsection5.10,automatisedaccesstothisdatawillensurethatthedatapoolavailabletoESMAformonitoringEUAsmarketsisascompleteaspossibleandcanbeintegratedintoongoingmonitoringactivities.111AsdefinedinArticle67ofMIFIDII112AnnexIofCommissionDelegatedRegulation(EU)2017/590113AccordingtotherevisedMiFIRArticle26ontransactionreporting“thecompetentauthoritiesshallwithoutunduedelaymakeavailabletoESMAanyinformationreportedinaccordancewiththisArticle”.129407.Therefore,thechangerecommendedbyESMAwouldhelpinhavinganeasierandmorecompleteoverviewoftheEUAmarketwhichwouldimprovesurveillanceandoverallhelpinmaintainingorderlymarkets.5.8ImprovedEUAregistry5.8.1Background408.Since2012allEUETSoperationshavebeencentralisedintheUnionRegistry,whichisadatabaseoperatedbytheEuropeanCommissionthatholdsaccountsforallentitiesparticipatingintheETSmarkets(operatorswithcomplianceobligationsaswellasotherentitiestradingEUAswithoutcomplianceobligations)whereEUAsareregistered.Thebookentryinanentity’saccountintheUnionRegistryisprimafacieproofofownershipofanEUA.OtherthanrecordswhicharerequiredforoperatorstocomplywithETSrequirements(suchastherecordingofverifiedCO2emissionsandtheirreconciliationwithallowances),alltransactionsbetweenaccountsintheRegistryarealsoregistered.Asexplainedbeforeinthisreport,theUnionRegistrydoesnotincludeinformationrelatedtothefinanciallegofatransactiononEUAs.409.DespitethefactthataccountsintheRegistrymightbeusedasomnibusaccounts(whichmakesitdifficulttoidentifythefinalholderoftheEUA),theinformationintheEURegistryisveryvaluableforthesupervisionofEUAmarkets.EnsuringitislegallyandeffectivelyaccessibletoNCAs,thesamewaythatotherregulatorydatasets,wouldcontributetocompletetheinformationthatsupervisorscouldusetoidentifybetterpotentialabusivetradingpractices.410.Whencarryingouttheanalysisrequiredforthepreparationofthisreport,ESMAhascomeacrossseveralbarrierswithregardstothedataintheUnionRegistry.Inparticular,theidentificationofaccounts’holdershasprovenchallenging.TheRegistryRegulationintroducedonlyasof1January2021theobligationforaccountsintheRegistrytobeidentifiedwithanLEI(whereassigned).Asaconsequence,thenumberofaccountsthatcancurrentlybeidentifiedwithanLEIisverylow.Furthermore,therequirementtoflagpureOTCtransactionsinthesettlementdatarecordedintheEUregistry(EUtransactionlog)wasnotaccompaniedbyanyvalidationruletoensurethatthedatainputtedintheregisteractuallycontainedsuchflag.Asaresult,thisinformationisnotprovidedfornearly46%ofalltransactionsin2021includedintheregistry.411.Furthermore,thefactthataccountscanbeusedasomnibusaccountswheretheaccountholderholdsEUAsonbehalfofthirdpartiesmayhavetwoimplications,firstintermsofdataavailabletoNCAsthroughtheRegistryasalreadyhighlightedinSection5.2ontheClarificationofEUApositionreporting;secondly,onthesegregationapplicabletotheassetsoffinalownerswhichcurrentlydoesnotseemtohavebeendefinedintheRegistryRegulation.1305.8.2Recommendation412.Inordertolifttheidentifiedbarriers,ESMAencouragestheCommissiontourgeadministratorsofnationalregistriestoensurethetimelyimplementationoftherequirementrelatedtotheidentificationofaccountsholderswithLEIs.Inaddition,toincreasedataharmonisationandavoidduplicationofreportingflowsinlinewithESMAandECdatastrategies114,ESMAwouldrecommendfurtherchangestotheEUregistryregulationtoensurethatthedataavailabletoNCAsandESMAthroughtheRegistryisalignedwiththesamestandardsandstructuresusedinregulatoryreportsunderMiFID/EMIR.ThisshouldfacilitateaccessbyNCAsandsubsequentassessmentinconjunctionwithotherdatasets.Furthermore,ESMAinvitestheCommissiontoconsiderassessingwhetherassetsegregationrules,whenaccountsintheRegistryareusedasomnibusaccountscouldimprovethefunctioningoftheregistry(e.g.allowingforbetterprotectionofassetsandgreatervisibilityofthefinalEUAholderintheEURegistry).5.8.3Impactandregulatorygoal413.Asindicatedinsection5.10,ESMAconsidersthataccesstothedatacontainedintheUnionRegistrybyauthoritiesresponsibleforthesupervisionofEUAmarkets,aswellastheexchangeofthisdataamongthem,shouldbefacilitatedandautomatisedtomakesurethedatapoolisascompleteaspossibleandcanbeintegratedintomarketsurveillanceactivities.414.Therefore,thechangerecommendedbyESMAwouldhelpinhavinganeasierandmorecompleteoverviewoftheEUAmarketwhichwouldimprovesurveillanceandoverallhelpinmaintainingorderlymarkets.415.Assetsprotectionrequirementsareparticularlyrelevantforfungibleassets,suchasEUAs,whichmightbekeptinoneaccountonbehalfofseveralfinalassetsholders.WhentheaccountintheregistryisthatofaCCP,requirementsapplicabletotheCCPensurethatitmaintainsseparateaccountsallowingittoidentifywhoistheowneroftheassets.However,ifanyaccountintheUnionRegistrycanbeusedasan“omnibusaccount”,havingfurthersafeguardsfortheprotectionoftheassetsbyensuringthatrecordsandaccountsarekeptthatenabletosegregatetheEUAsheldforitsownaccountfromthoseheldonbehalfofotherswouldbeappropriatetostrengthentheprotectionoffinalEUAsholders.5.9Positionlimits5.9.1Background416.AsstatedinArticle57(1)ofMiFIDII,positionlimitsaimatpreventingmarketabuseandsupportingorderlypricingandsettlementconditions,includingpreventingmarket114StrategyonsupervisorydatainEUfinancialservices,COM(2021)798final.131distortingpositions,withoutprejudicetopricediscoveryonthemarketfortheunderlyingcommodity.417.UnderMiFIDII,asamendedbytheMiFIDIIRecoveryPackageforcommodityderivatives,positionlimitsapplytoagriculturalcommodityderivativesandtocriticalorsignificantcommodityderivativesdefinedascommodityderivativecontracts,otherthanagriculturalcommodityderivatives,withanetopeninterestabove300,000lots.418.AsclarifiedinRecital(14)oftheMiFIDIIRecoveryPackage,positionlimitscontinuetoapplytoallagriculturalcommodityderivatives“duetothecriticalimportanceofagriculturalcommoditiesforcitizens”.Thecriticalimportanceofagriculturalcommodityderivativesforcitizensalsojustifiesthatagriculturalcommodityderivativeswheretheunderlyingcommodityqualifiesasfoodintendedforhumanconsumptionaresubjecttostricterpositionlimitsthanothercommodityderivatives.Asregardsnon-agriculturalcommodityderivatives,theintentionwastorestrictpositionlimitstokeybenchmarkcontractswherepriceformationtakesplaceandthatmayhavearoleinthepricingoftheunderlyingcommodityandothercommodityderivatives.5.9.2Issueforconsideration419.Positionlimitscurrentlyonlyapplytocommodityderivatives,andthereforenottoEUAderivatives.ConsideringtheconcernsvoicedoverthelastfewmonthsregardingthefunctioningoftheETSandthecitingofpositionlimitsinthepublicdiscussionasapotentialadditiontothelegislativeframework,ESMAhasconsideredthepotentialbenefitsanddrawbacksofintroducingpositionlimitsonEUAderivatives.5.9.3Impactandregulatorygoal5.9.3.1Argumentsinfavour420.Futuresonemissionallowancesandoptionsonfuturesonemissionallowancesarephysicallysettled,whichrequirestheunderlyingemissionallowancestobedelivereduponthepredetermineddeliverydate.Asnotedinthe2011IOSCOPrinciplesfortheRegulationandSupervisionofCommodityDerivativesMarkets115,“thetradingofphysicalcommodityderivativesdiffersfundamentallyfromthetradingoffinancial-basedderivativesinthattheactualsupplyoftheunderlyingphysicalcommodityisrestrictedtoafinitesupply”.Duetothisfinitesupply,marketparticipants,individuallyoratgrouplevel,mayseektobuildandmakeuseofadominantpositiontosqueezeorcornerthemarketandsecurethepriceofacommodityderivativeoroftheunderlyingcommodityatanartificiallevel.421.Whilerecognisingthatriskstoorderlymarketsalsoexistforcash-settledcontractswhereapositionholderwouldhavethecapacitytoinfluencethepriceoftheunderlying,ESMA’sanalysisisthatsuchrisksaremoresalientforphysicallysettledcommodityderivatives.115https://www.iosco.org/library/pubdocs/pdf/IOSCOPD358.pdf132AsnotedinESMA’sReviewreportonpositionlimitsandpositionmanagement116,derivativecontractsthatrequirethedeliveryofaphysicalassetaremostsusceptibletomanipulativebehaviourswhenthedeliverablesupplyforsuchcontractsissmallrelativetothesizeofpositionsheldbymarketparticipants.422.Concernsaboutpotentialmarketsqueezesappearrelevantfortheemissionallowancederivativemarketconsideringnotonlythatemissionallowancesareofafinitesupplybutalsothatthisfinitesupplyis,andwillcontinuetobe,reducedovertimeinlinewiththeEU’sdecarbonisationagenda.Introducingpositionlimitstopreventthebuildingupoflargederivativepositionsandrestrictthequantityofemissionallowanceseachpersonmaymakeortakedeliveryofwouldthereforebeappropriateforderivativesonemissionallowancestolimitrisksofmanipulativebehaviour,withlimitsbeingadjustedonaperiodicbasistothedecreasingnumberofemissionallowancestoremainmeaningful.423.Theargumentcouldalsobemadethat,asforagriculturalcommodityderivatives,theimportanceoftheETSmarketforcitizensinlightofasuccessfulzeronetemissionstrategycallsforaspecificregulatoryframework.424.Whilepositionlimitsonderivativesonemissionallowanceswouldintroduceadditionalrequirementsformarketparticipants,theexperiencegainedoverthelastthreeyearsdidnotdemonstrateanydetrimentalimpactofthebespokepositionlimitssetbytherelevantNCAoncommodityderivativestrading.Furthermore,thepositionlimitregimerecognisesthatformarketstofunctioneffectively,participantsmustbeabletobothfindandprovideliquidityandremoveunnecessaryrestrictionsintheformofpositionlimitexemptions.Hedgingpositionsheldbynon-financialentities,donotcounttowardsthepositionlimits.Positionsheldbyfinancialandnon-financialcounterpartiesresultingfrommandatoryliquidityprovisiononatradingvenuearealsoexemptedfrompositionlimits.5.9.3.2Argumentsagainst425.TheintroductionofpositionlimitsonderivativesonemissionallowanceswouldbringasignificantchangetothecurrentregulatoryframeworkanditsimpactonthefunctioningoftheETSmarketisdifficulttofullyanticipate.426.Positionlimitsmaynegativelyimpactthefunctioningoftheemissionallowancederivativemarketbypreventingfinancialentitiestocontinuefullyplayingtheircrucialroleinprovidingliquiditytothemarketandactingascounterpartiestocomplianceentitiesseekingtohedgetheirexposuretothemarketcarbonpriceinthefuturesmarket.427.Althoughthenumberofemissionallowancesissuedwillbereducedovertime,someofthefeaturesoftheETSmarketappeartoalreadymitigatetheriskofmarketsqueezes.Theauctionsofemissionallowancestakeplacedailyandtheauctionplatformhasthepossibilitytointroducelimitsastothemaximumnumberofallowancesthatentitiescanbidfor.Inaddition,undercurrentlegislation,freeallocationofemissionallowanceswill116https://www.esma.europa.eu/sites/default/files/library/esma70-156-2311_mifid_ii_review_report_position_limits.pdf133beavailabletoeligibleETSoperatorsupto2030andthoseemissionallowancescouldbecomingtothemarketincaseofapotentialsqueeze.428.AlthoughMiFIDIIprovidesforanexemptionfrompositionlimitsforpositionsdirectlyresultingfrommandatoryliquidityprovisiononatradingvenue,suchexemptionwouldbetoonarrowtocoverthelessformalisedliquidityprovidedbyfinancialcounterpartiestakingtheothersideoftradeswithnon-financialentities.Introducingpositionlimitsmayreduceliquidityintheemissionallowancederivativemarketandtherebycontributetoincreasedvolatilityandreducemarketresilience.429.Positionlimitsmayincreasethecostandcomplexityforcomplianceentitiestohedgeinthefutureandwillnotfurtherincentivisecomplianceentitiestousetheemissionallowancederivativemarketasausefulriskmanagementtool.430.Inadditiontothemarketimpactsdescribedabove,positionlimitswouldbeasourceofmaterialimplementationcosts,includingforcomplianceentitiesandtradingvenues.Settingpositionlimitswouldalsorequiredetermining,andregularlyupdating,theinformationondeliverablesupplyinemissionallowances,startingfromthenumberofcertificatesauctionedandthenassessingthenumberofcertificatesactuallyavailablefortradingandwouldthereforeaddcomplexitytotheregulatoryregime.5.9.3.3ESMA’sassessment431.ESMA,takingintoconsiderationtheresultsofthedataanalysis,doesnothaveafinalviewaboutwhethertheintroductionofpositionlimitsfortheemissionallowancederivativesmarketwouldbeappropriateatthispointintime.ESMAwouldhoweverliketoemphasisethatintroducingpositionlimitswouldbenewandunchartedterritoryandthedecisionifandhowtoestablishapositionlimitregimeforemissionallowancederivativesshouldbethesubjectofaseparate,in-depthanalysiswhichgoesbeyondwhatispossiblewithintheshorttimelinewithinwhichthisreporthadtobedrafted.432.ESMAalsowishestohighlightthatauniquemarketliketheoneforemissionallowancesrequirestailor-madesolutionssoanypositionlimitregimewouldneedtobecalibratedpreciselytothepeculiaritiesoftheEUAderivativemarket.433.ESMAalsoconsidersthattheintroductionofpositionlimitsforderivativesonemissionallowancesshouldnotbeoverburdenedwithexpectationsanditwillnotbetheonemeasurewhichcouldaddressallconcernsabouttheEUAmarketcurrentlybeingdebatedatthepoliticallevel.434.Inaddition,considerationmayalsobegivenastowhethertheappropriatelevelforsettinglimitswouldbeatthephysicalcertificatelevel,i.e.tothenumberofspotemissionallowancesapersonmayholdacrosstheEU,ratherthanatthelevelofthederivativeonemissionallowances.1345.10AcentralisedmarketmonitoringoftheEUcarbonmarket5.10.1Background435.AsESMAexperiencedwhenassemblingthedatanecessaryfordraftingthisreport,theavailabledataontheEUcarbonmarketappearsquitefragmented(Table3)andthedatasetsusedforthisreport,includingauctionreports,EMIRtraderepositoriesreports,transactionreports,weeklypositionreportsandUnionRegistrydatahadtobecollectedfromavarietyofsources.Asexplainedinsection4.3.1,eachdatasethasaspecificscopeintermsofcounterpartiesandinstrumentscoveredanditsowndataformat.TheunprecedenteddataanalysisofthecarbonmarketperformedbyESMAforthisreportbroughttolightthemultiplechallengesassociatedwithreconcilingthosevariousdatasourcestohaveacomprehensiveviewofthecarbonmarket.436.Asexplainedinsection4.3.5,theassessmentofMiFIRtransactiondatareceivedfromtheNCAshasbeenparticularlychallengingduetothefactthatESMAhasneveraccessedthisdatainthepastandthatupuntilthisyearthedatawasexclusivelycollectedandstoredinthevariousNCAs’databases.However,asof2022ESMAreceivesallMiFIRtransactionreportingdatafromtheNCAs.TosupportthenewDRSPsupervisorytasks,ESMAhasdevelopedanewsystemtocollecttransactiondata,storeitandperformdataqualitycontrolsandwillbeabletoconsistentlyprocessandcleanthisdataset,coveringanymisalignmentintheprocessofgatheringdata.However,atpresent,ESMAonlyhasthepossibilitytousetransactiondataforthesupervisionofDRSP,while,asthisreportproves,thisdatasetwouldbeusefulforotherpurposes.ProvidedthatESMAcanuseMiFIRtransactiondatareceivedunderArticle26(1)ofMiFIRforthepurposeofmonitoringtheemissionallowancesmarkets,thisdatasetcouldinthefutureenableESMAtogainanevenbetterinsightofEUAsandderivativesthereofandalsoanyotherfinancialinstrumentreferringtoEUAs(e.g.,ETC/ETNsandotherstructureddebtinstruments)thatarenotreportedunderEMIR.5.10.2Issueforconsideration437.ESMAisawareofconsiderationssuggestingamorecentralisedapproachtothemonitoringofthecarbonmarketandthereforeinthisreportistakingtheopportunitytoprovidesomethoughtsinrespectofapotentialcentralisationofmonitoring.438.Currently,noexampleexistsintheEUofafinancialinstrumentwithintheremitofESMAbeingcentrallymonitoredatEuropeanlevel.Instead,EuropeanandnationallegislationdescribethecompetencesandpowersofNCAswithregardtothemonitoringandsupervisionoffinancialinstrumentsbeingtradedintheirrespectivejurisdictions.439.However,whenlookingatothermarketsintheEU,thereisatleastoneexampleofcentralmonitoringwhichisworthexploringandcouldbereplicatedinanadaptedformatforemissionallowancesinordertoimprovemarketoversight.Indeed,wholesaleenergymarketsarecentrallymonitoredbytheAgencyfortheCooperationofEnergyRegulators(ACER).135440.TheEURegulationonEnergyMarketIntegrityandTransparency117(REMIT)establishedthebasisforthemonitoringofwholesaleenergymarketsatEuropeanlevelbyacknowledgingthecross-borderimplicationsofmanipulativebehaviourandthesubsequentneedtohaveacentralapproachtomarketmonitoring.REMITdescribesthedifferentrolesandmissionsofnationalregulatoryauthorities(NRAs)andACERandtheneedforthesetocooperateclosely.AccordingtoREMIT,ACERisbestplacedtocarryoutmarketmonitoringatEUlevelasithasaUnion-wideviewofelectricityandgasmarkets,whilenationalregulatoryauthorities(NRAs)haveacomprehensiveunderstandingofdevelopmentsofenergymarketsintheirMemberStates.441.ACERhasdevelopedsystemsofcollectionandanalysisofdatawhichallowsittodetectpotentialmanipulativebehaviourinwholesaleenergymarkets.SuchinformationissharedwithNRAsforenforcementaction,ifneeded.NRAscanalsomonitormarkets.Assuch,REMITestablishesasupervisoryframeworkwithtwolayersofmarketmonitoring,oneatEUlevelandanotherone(optional)atnationallevel.442.Enforcementhoweverremainsanexclusivecompetenceofnationalauthorities.Furthermore,ACERhasthenecessarypowersandtoolsinplacetoensurecoordinationwithNRAswhichinclude,amongothers,powerstorequestNRAstocommenceaninvestigationincasesofsuspicionofmarketmanipulativebehaviour.443.ESMAhaslookedintowhetherthereisacaseforacentralisedmarketmonitoringoftheEUcarbonmarketsimilartotheroleandresponsibilitiesentrustedtoACERforgasandpower.5.10.3Argumentsinfavour444.Asexplainedintheintroduction,emissionallowancesareverydistinct,uniquefinancialinstrumentscreatedbyEUlaw,issuedbythe30countriesparticipatingintheETS(27EUMemberStates,Norway,IcelandandLichtenstein),wheretheprimarymarkettakesplaceunderanauctioningprocessandwhereemissionallowanceholders’accountsareheldinaUnionRegistryoperatedbytheCommission.TheEUcarbonmarketisaveryEuropeanonebynaturewhichcanbetakenasanargumentmorethanforanyotherEUfinancialmarketorinstrumentforacentralisedmarketmonitoringatEUlevel.Moreover,theorderlyfunctioningandreputationoftheEuropeancarbonmarketareofcriticalimportancetotheEUastheEUETSisexpectedtoplayakeyroleinachievingtheincreasedEU’sclimateambitionsenshrinedintheEuropeanClimateLaw118.445.Tomeetitsobjective,suchcentralisedmarketmonitoringshouldnotablybuildonthepoolingoftransactionreportsonemissionallowances,includingprimarymarkettransactions,transactionreportsonderivativesonemissionallowances,orderdatakept117Regulation(EU)No1227/2011oftheEuropeanParliamentandoftheCouncilof25October2011onwholesaleenergymarketintegrityandtransparency118Regulation(EU)2021/1119oftheEuropeanParliamentandoftheCouncilof30June2021establishingtheframeworkforachievingclimateneutralityandamendingRegulations(EC)No401/2009and(EU)2018/1999(‘EuropeanClimateLaw’),OJL243,9.7.2021,p.1–17136bytherelevanttradingvenuesanddailypositionreports,underharmoniseddatastandards.446.Theintendedpositiveeffectwouldbethatallrelevantdatawouldbeavailableinoneplaceallowingforthedetectionofpatternsthatmaynotbevisiblewhenlookingatthedataonapiecemealbasis.Thiscentraliseddatasetcouldthenbeinterrogatedbypurpose-builtmarketsurveillancesoftwarewiththegoaloftriggeringalertsofpotentialwrong-doingwhichwouldbeindependentlyanalysedandpassedontoNCAs.447.EffectivecentralisedmarketmonitoringoftheEUcarbonmarketwouldalsorequirestreamlinedaccesstoenhancedEUregistrydata,complyingwithdatastandardscustomarytofinancialregulationandtotheprimarymarkettransactionsreportedundertheAuctionRegulationinaccordancewiththerecommendationsinsections5.8and5.7abovetoensurethatanascompleteaspossibledatapoolisavailableforcentralisedmarketmonitoring.448.Asitisthecaseforwholesaleenergymarkets,manipulativebehaviourinonesegmentoftheEUAmarket(primaryorsecondary)canhavecross-borderimplications.TradesinemissionallowancestakeplaceacrossjurisdictionsandespeciallyinrespectofOTCtrades,detectionofpotentialcross-bordermarketabuseheavilyreliesonthecooperationbetweendifferentnationalauthorities.449.Withalonger-termview,centralisedmonitoringofthecarbonmarketwouldalsobeanopportunityforsynergiesincross-marketmonitoring(carbonvsgas/power)inclosecooperationwithACERtopotentiallyidentifyproblematicbehaviourwhichonlybecomesapparentwhenlookingatanevenbroaderdatasetincorporatingsomewhatcorrelatedassetclasseslikepowerandgas.5.10.4Argumentsagainst450.ThesettingupofacentralisedmonitoringoftheEUcarbonmarketwouldbeamajorchangetothecurrentorganisationofmarketmonitoringintheEU.ItshouldbejustifiedbyanidentifiedfailureintheEUcarbonmarketmonitoringperformedbycompetentauthorities.451.Suchcentralisedmonitoringwouldaddanotherlayerofmonitoringtoanalreadycomplexsupervisoryenvironment.Itmaybeasourceofsubstantialimplementationcosts,rangingfromfurtherdatastandardisationtothedevelopmentofadditionalmarketmonitoringtechnologiesandskills.452.ItwillalsotaketimetoimplementandtoassesswhetherthebenefitsexpectedfromsuchsignificantchangetotheEUcarbonmarketmonitoringframeworkareindeeddelivered.453.AsthemarketsurveillanceofEUAsonlyinvolvesthreecountries,theNetherlands,NorwayandGermany,amplifiedcooperationbetweentheseauthoritiesandstreamlinedaccesstothestandardisedUnionregistrydataandprimarymarkettransactionsbyallthoseauthoritiesmayproveaswifterwayofenhancingthemarketmonitoringoftheEUcarbonmarket.1375.10.4.1ESMA’sassessment454.ESMAdoesnothaveafinalviewatthispointintimewhetheramorecentralisedmonitoringoftheEUcarbonmarketshouldbeintroduced.Alsointhiscase,thetopicrequiresamorein-depthanalysiswhichcouldnotbeperformedwithintheconfinesofdraftingthisfinalreport.455.Inanycase,anycentralisedapproachshouldbecustom-designedforthepeculiaritiesoftheEUAmarketandsuchdesignneedstobecarefullyconsideredtoensurethatallrelevantdatasourcesareaccessibletoacentralmonitoronparwiththecorrespondingsourcesavailabletoACER.456.ESMAalsoconsidersitimportanttohighlightthatwhileacentralisedmonitoringoftheEUcarbonmarketmayraisehighexpectations,itwouldonlyservethepurposeofbetteridentifyingpotentialmarketmanipulationandabusepractices.ItwouldnotbeabletoaddressotherconcernsthathavebeenvoicedbyanumberofpartiesinrelationtotheEUcarbonmarket.Morespecifically,amorecentralisedmonitoringwouldnotpreventpriceincreases(ordecreases)anditwouldnotpreventmarketvolatilityintimesofstress.457.Ifacentralisedmonitoringofthecarbonmarketwastobeintroduced,ESMAconsidersthattheremaybemeritinassigningthattasktoESMA.458.ConsideringthatemissionallowancesandtheirderivativesarefinancialinstrumentsunderMiFID,thoseinstrumentsarealreadywithinESMA’sremit.ESMAhaswellestablishedcooperationstructureswiththeNCAsandisalreadydiscussingmarketstructure,reporting,marketintegrityandcommodityderivativeissueswiththoseNCAsonanon-goingbasis.ESMAisalsocontinuouslypreparingsinglerulebookandsupervisoryconvergencetoolsdealingwithspecificissuesarisingunderMiFID,EMIRandMARandashighlightedandevidencedinthisreporthasadegreeofexperienceindealingwiththecarbonmarketitself.ESMAwouldnaturallybeabletoapproachanycentralisedmonitoringfromaEuropeanperspectiveanditwouldalsobeinagoodpositiontocooperatewithbutalsotolearnfromACERwhohasimplementedthistypeofcentralisedmonitoringrelativelyrecently.Morespecifically,theDRSPdirectsupervisionmandatealreadyenhancesESMA’smonitoringandassessmentcapabilitiesofMiFIRtransactiondataandputsESMAintheuniquepositionofcrosscomparingandverifyingtheinformationwithanotherdirectlyavailabledatasetunderESMAsupervision–EMIRdataonOTCderivatives.Asofthisyear,ESMAbenefitsfromcentralisedARMandTRsdatamanagement,in-houseadvancedanalyticaltools,andspecialisedknowledgetolookatMiFIRdataandfurtherimprovetheirquality,usability,andcomparabilityagainstEMIRdata.459.Finallyandindependentlyofanyconsiderationofwhetheracentralisedmonitoringsystemshouldbeimplemented,ESMArecommendstheintroductionofaclearlegalbasisallowingforacomprehensiveexchangeofspecificinformationbetweenESMAandACER.460.AnexchangeofdatawithACER,inordertocomparetheevolutionofthecarbonmarketwiththewholesaleenergymarket,isinESMA’sviewjustifiedbytheneedtoacquirethenecessaryinformationforacomprehensiveunderstandingofthemarkettrends,given138thestrictinterlinksbetweenthetwomarkets.However,thereiscurrentlynospecificprovisionallowinganexchangeofindividualdatawithACERinthatsense.GiventhelevelofconcentrationinsomesegmentsoftheEUAmarketasevidencedinprevioussectionsofthisreport,exchangingindividualdatawithACERforthesakeofmonitoringandassessingmarketdevelopmentswouldbenecessaryoutsideMARprovisionswhichratheraimatenforcingactionagainstmarketmanipulation.5.11Conclusions461.ESMAhaspreparedthisfinalreportinresponsetotherequestbytheCommissioninitsCommunicationonenergypricesfrom13October2021.ESMAappreciatesbeingentrustedwiththisreviewofthecarbonmarketandconsidersthatassemblingthisreporthasunearthedsomeimportantfindingswhich,ifaddressed,wouldimprovethefunctioningofthismarketinthefuture.462.AsindicatedinthepreliminaryreportpublishedbyESMAinNovember2021,ESMAhasperformedacomprehensivedataanalysisutilisingallavailablesourcesofdatathatprovidedeeperinsightsintothestateoftheEUAmarket.Inaddition,ESMAhasprovidedamuchmorein-depthoverviewofhowtheEUAmarketitself,andhowthesurveillanceoftheEUAmarket,workinpractice.ESMAisalsoconsciousthatrecentdevelopmentsinthecarbonmarketareheavilyinfluencedbythewarintheUkraine.ESMAhastriedtointegratethosedevelopmentsintoitsanalysisoncarbonmarketpricesbutithadtoapplyacut-offdateof4MarchtobeabletointegratedataaheadofthesubmissionofthefinalreporttotheESMABoardofSupervisors.ESMAappreciatesthattheserecentdevelopmentsinthecarbonmarketmaywellrequireadditionalanalysisinthefuture.463.ESMAhasdecidedtodescribeandanalysealltheelementscontainedinthisreporttoprovidepolicymakerswithafactual,comprehensiveandsolidfoundationtodeterminewhetheradditionalmeasurestoregulatetheEUAmarketareconsiderednecessary.464.Atthesametime,ESMAwishestohighlightagainthattherearecertainshortcomingsofthedataESMAwasworkingwith.ManyofthoseareassociatedwithBrexitandthesimplelossofregulatorydataduetotheUKleavingtheUnionbutotherscanandshouldbeaddressedattheEUlevelandESMAhasdescribedthemeasuresitwouldconsiderappropriatetoimprovequalityandaccessibilityofdata.465.Overall,ESMAconsidersthatthepolicyrecommendationsdescribedinthisreportwouldcontributetoimprovingthetransparencyandthemonitoringoftheEUAmarket.ESMAbelievesthatthemeasuresproposedwouldprovidemoreinformationtomarketparticipantsandthepublicatlargeaboutthecarbonmarketandwouldhelpinmaintainingorderlymarkets,therebycontributingtothecontinuedadequatefunctioningoftheEUAmarketwhichplaysanimportantrolefortheUnion’stransitiontoalow-carboneconomy.466.ESMAwouldhoweveralsoliketoemphasisethattherecommendationsinthisreportaredraftedfromtheperspectiveofsecuritiessupervisors.Therecommendationsaredesignedtopromotefairandorderlymarkets,buttheyarenotintendedtocontrol139absolutepricelevelsorvolatilityofEUAs.Neitherdotheyaddressfundamentalfactors,suchasambitiousenvironmentalpolicyobjectivesorthepriceofothercommoditiescloselylinkedtoEUAssuchasgas.467.ESMAconsidersthatanymorefundamentalmeasurestargetedattheEUAmarketarefortheCommissionandtheCo-legislators.WhatESMAhasprovidedissomefactualbackgroundinformation,basedondataandsecuritiessupervisorsexperience,toallowEUpolicymakerstomakeinformeddecisions.468.ESMAstandsreadytohelpimplementinganymeasureswhichtheCommission,CouncilandParliamentdecideonandwouldalsobehappytoprovideadditionalanalysisoradviceduringthecourseofanyfuturedeliberationsinrespectoftheEUAmarket.Inaddition,ESMAwillswiftlyproducethesupervisoryconvergencemeasuresdescribedinthisreportandwillcontinueworkingwiththecomprehensivedatasetaccumulatedtocarryoutanalyseswhichwerenotpossibleintheshorttimespanavailabletodeliverthisreportandtherebydeepenitsunderstandingoftradingincarbonmarkets.469.ESMAwouldliketoemphasiseitsstrongcommitmentnottolosesightofdevelopmentsintheEUAmarketfollowingtheconclusionofthisreport,butrathertocontinueintensifyingitsfocusonbetterunderstanding,explainingandmonitoringthisimportantmarket.1406Annexes6.1Annex1470.TheintradayvolatilitycomputedasParkinson(1980)assumestheunderlyingfollowsacontinuousBrownianMotionwithnodrift(i.e.stationarity).Thisestimatorcouldbemorereliableforilliquidmarkets.𝐼𝑛𝑡𝑟𝑎𝑑𝑎𝑦𝑉𝑜𝑙𝑎𝑡𝑖𝑙𝑖𝑡𝑦𝑠𝑡=√14𝑙𝑛2(ln⁡(𝐻𝑖𝑔ℎ𝑃𝑟𝑖𝑐𝑒𝑠𝑡𝐿𝑜𝑤𝑃𝑟𝑖𝑐𝑒𝑠𝑡)2)2⁡⁡471.𝐻𝑖𝑔ℎ⁡𝑃𝑟𝑖𝑐𝑒𝑠𝑡⁡isthestock’shighesttradingpriceondayt,and𝐿𝑜𝑤⁡𝑃𝑟𝑖𝑐𝑒𝑠𝑡⁡isthestock’slowesttradingpriceondayt.472.TheRogersandSatchell(1991)volatilitysupposestheunderlyingtracksacontinuousBrownianMotionwithadrift(i.e.nostationarity).Onelimitationisthatitdoesnotaccountforjumpsinprice,thatisthemarketshownosurprise.𝐻𝑠𝑡⁡isthestock’shighesttradingpriceondayt,𝐿𝑠𝑡isthestock’slowesttradingpriceondayt,𝐶𝑠𝑡isthestock’sclosingpriceondaytand𝑂𝑠𝑡isthestock’sopeningtradingpriceondayt.𝑅𝑆⁡𝑉𝑜𝑙𝑎𝑡𝑖𝑙𝑖𝑡𝑦𝑠𝑡=√ln(𝐻𝑠𝑡𝑂𝑠𝑡)(ln(HstOst)−ln(𝐶𝑠𝑡𝑂𝑠𝑡))+ln(𝐿𝑠𝑡𝑂𝑠𝑡)(ln(𝐿𝑠𝑡𝑂𝑠𝑡)−ln(𝐶𝑠𝑡𝑂𝑠𝑡))473.TheHerfindahl-HirschmanIndex(HHI)isawidelyusedmeasuretodeterminetheconcentrationofamarket.ThegraphsbasedontheHHIshowthedevelopmentofconcentrationofopencontractsbyallcounterparties(excludingcentralcounterparties)inEUAderivativesmarketsandofEUAauctionsheldasEEX(SeeSection5).AhigherHHIisassociatedwithhigherconcentration,i.e.,lesscompetitioninamarket,andasmallerHHIisassociatedwithamorecompetitive,i.e.,lessconcentrated,market.Thecalculationisasfollows:𝐻𝐻𝐼=⁡∑(𝑀𝑎𝑟𝑘𝑒𝑡𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛2)𝑁𝑖=11416.2Annex2Summaryofthepolicyrecommendationsandissuesforconsiderations6.2.1PolicyrecommendationsTopicSectionRegulatorytoolPolicyrecommendationInstrumentscoveredPositionmanagementcontrols5.1MiFIDIILevel1andLevel2ESMArecommendsextendingpositionmanagementcontrolstotradingvenuestradingEUAderivatives.EUAderivativesEUApositionreporting5.2[MiFIDIILevel1andLevel2]UnionRegistryRegulationESMArecommendsdeletingEUApositionreportingunderMiFIDII.ESMArecommendsthattheaccountstructureattheUnionRegistryisamendedtoallowfortheidentificationofindividualemissionallowanceholderssothattheUnionRegistrycanbeusedasadatasourceformarketmonitoringbyNCAandtransparencyformarketparticipants.EUAsWeeklypositionreports5.3.2.1MiFIDIILevel1andLevel2ESMArecommendsthattradingvenuespublishweeklypositionreportsonopenpositionsinEUAfuturesonlyinadditiontothecurrentcombinedreportonopenpositionsinEUAfuturesandoptionsonEUAfutures.CommodityderivativesEUAderivativesWeeklypositionreports5.3.2.2MiFIDIILevel2ESMAguidanceintheshorttermESMArecommendsthatfurtherclarityisprovidedtomarketparticipantsregardingcounterpartyclassificationsinweeklypositionreports.CommodityderivativesEUAderivatives142Transparencycalibration5.4MIFIRLevel2AspartoftheRTS2reviewunderway,ESMAwillconsiderthepotentialneedforrecalibrationoftransparencythresholdsforemissionallowancesandemissionallowancederivatives.EUAsandEUAderivativesTransparencyandreportingofOTCtransactions5.5MiFIRLevel2ESMAguidanceintheshorttermESMArecommendsprovidingfurtherguidancetoensurethatonly“EU”ISINsareusedforthepurposeofreportingspotEUAs.ESMArecommendsthatfurtherclarityisprovidedonthedistinctionbetweenspotEUAsandEUAderivatives.EUAsandEUAderivativesTransparencyandreportingofOTCtransactions5.5MiFIRLevel1ESMArecommendsincreasingtheleveloftransparencyinOTCderivativeswiththeremovaloftheToTVconceptanditsreplacementwiththeSIapproachasoutlinedinitsreportontheMiFIRreviewofreportingobligations.DerivativesinstrumentssubjecttotransactionreportingChainoftransactionsintransactionreports5.6MiFIRLevel1andrelatedlevel2onreportingtemplatesESMArecommendsintroducinganewidentifierinthecaseofgroupingofordersthatwouldbegeneratedandreportedbyonlyoneentitypermarketexecutionandwouldbeuniqueforthemarket-sidereportsandtheclient-sidereportspertainingtothesameexecutionFinancialinstrumentssubjecttotransactionreportingPrimarymarkettransactions5.7EUAuctionRegulationESMArecommendsthattheEUAuctionRegulationisamendedtoensurethatESMAalsoreceivestheinformationonprimarymarketstransactionsinlinewiththeamendmentsintroducedinArticle26ofMiFIR,followingtheESAreview.EUAsUnionRegistry5.8EURegistryRegulationESMAencouragesthetimelyimplementationoftherequirementfortheidentificationofaccountsholderswithLEIs.ESMArecommendsincreaseddataharmonisationinlinewiththestandardsandstructuresusedinregulatoryreportsunderMiFID/EMIRandinvitestheCommissiontoconsiderassessingdefiningassetsprotectionsruleswhenaccountsintheRegistryareusedasomnibusaccounts.EUAs1436.2.2IssuesforconsiderationTopicSectionRegulatorytoolIssueforconsiderationInstrumentscoveredPositionlimits5.9MiFIDIILevel1andLevel2(ifimplemented)ESMAinvitestheCommissiontoconsidertheargumentsinfavourandagainsttheapplicationofpositionlimitsontheopenpositionapersonmayholdinEUAderivativesandeconomicallyequivalentOTCcontracts.EUAderivativesEUcarbonmarketmonitoring5.10MAR(ifimplemented)ESMAinvitestheCommissiontoconsidertheargumentsinfavourandagainstacentralisedmarketmonitoringoftheEUcarbonmarket.EUAsandEUAderivatives

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