European Emissions House of the Year - Barclays Capital

The 2009 award for European Emissions House of the Year has gone to Barclays Capital for both its steady commitment to the market as a liquidity provider and it ability to innovate in today’s turbulent times.

At the forefront of emissions trading in Europe, even before the inception of the EU Emissions Trading Scheme, BarCap has traded nearly 2 billion tonnes of carbon credits, with a total notional value of over €30 billion.Louis Redshaw, head of environmental markets at BarCap, believes the bank’s success is down to its ability to adapt. “We roll with the punches. Rather than shut up shop like some other firms, we have adapted to changing market circumstances to help provide a deep, liquid carbon market.”

Over the past year the bank has also pioneered trading in the US markets, taking its experience in Europe and applying it there. In February, the firm executed its first trades on a forward trade agreement, which includes provisions for US emissions allowances associated with the Regional Greenhouse Gas Initiative (RGGI), the first mandatory carbon cap-and-trade programme in the US.The US Emissions Allowance Transaction Annex, as published by the International Swaps and Derivatives Association (ISDA), has previously been used to document forward transactions of SO2 and NOx emissions allowances.

Barclays Capital, in consultation with Calpine Energy Services and Royal Bank of Canada, modified this existing documentation to include provisions that mitigate price and delivery risks associated with RGGI allowances. These risks, and a lack of standardised documentation, have constrained the development of a robust secondary over-the-counter (OTC) market for RGGI allowances.“We executed the first carbon emission allowance trades in the US employing this new contract,” says Redshaw. “As a pioneer in developing standardised agreements for environmental markets in the European Union, and in the absence of documentation from relevant trade associations, we believe we have the experience to construct a contract that will support all participants in the RGGI trading scheme,” he says.

2008 also saw Barclays make a series of amendments to its Standard Certified Emissions Reduction Forward Agreement (SCERFA) in response to the launch of the European Climate Exchange (ECX)’s CER future contract.

The SCERFA was created by Barclays Capital in October 2006 in order to establish an industry-standard set of trading terms and to promote the liquid and transparent secondary trading of CERs. The modifications are a result of evolving market practice and are aimed at reducing the basis risk between trading OTC SCERFA and ECX CER future contracts.

“Our intention when we launched the SCERFA was to accelerate the standardisation of CER trading,” says Redshaw. “This has happened over the course of the last 18 months and there has been good two-way pricing during this time. The launch of the ECX CER future contract is a sign that the CER market has come of age.”

Another achievement of the last year was BarCap’s launch of the iPath Global Carbon Exchange Traded Note (ETN). This is the first product of its kind that gives retail and institutional investors access to a transparent, cost-effective and convenient way to access the returns of an international carbon price benchmark with easy transferability and an exchange listing.

Many carbon and climate change indices cover equity stocks but not carbon credit prices directly. None of the competitor products offer the ease of access provided by the iPath ETN, BarCap believes. Several large ‘green funds’ in both the Far East and Europe have already invested in the product.

In the past year, BarCap has also set up an exotic options desk that can offer prices in forward starting and quanto options. This is a key development that enables market participants to manage the volume and price risks associated with their emissions portfolios in similar ways to other more developed commodities markets such as crude oil and refined products.

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