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MANAGING COUNTERPARTY RISK IN CO 2 DEALS

MANAGING COUNTERPARTY RISK IN CO 2 DEALS - Information for operators and other market participants. 15 October, 2005. R isk in the settlement of CO 2 deals.

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MANAGING COUNTERPARTY RISK IN CO 2 DEALS

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  1. MANAGING COUNTERPARTY RISK IN CO2 DEALS - Information for operators and other market participants 15 October, 2005

  2. Risk in the settlement of CO2deals After concluding an Agreement for the buy / sale of CO2 emission units both party depend on the other party’s willingness to fulfill its obligations, because none of them can be sure that his transfer of assets will be followed by the other party’s one. Settlement of the deals always comes together with counterparty risk.

  3. Similarities to the securities market • CO2 emission units are in many sense similar to securities (considered to be investment instruments by law). • In securities settlement counterparty risk is treated in an established way. • This best practice can be applied for CO2 deals too. • Safe settlement can be reached through investment service providers (ISPs) and KELER.

  4. How can counterparty risk be excluded? With the Delivery Versus Payment = DVP method, => in this way the clearing house assures - by connecting cash and CO2 emission unit transfer - that none of the parties can be out of possession during the settlement procedure.

  5. Why KELER? • KELER is the central clearing house & depository in Hungary, keeping the central registry of securities. • KELER has more than 10 years’ experience in the settlement of securities deals. • KELER is a central, market neutral institution.

  6. The Registry • Operators will receive certain number of CO2 emission units from State free of charge. Units will be held centrally in the authentic and public Registry as an electronic sign. Change of ownership is possible through the transfer of units in the Registry. • Operators, ISPs, KELER, etc. will open an account in the Registry.

  7. The settlement process 1/3 • Signing an Agreement for the buy / sale of units (with the amount, price, settlement day, method of settlement, etc. agreed). • Seller and Buyer give instructions to their ISPs to settle their deal through a DVP mechanism through KELER. • The ISPs submit their Settlement Instruction forms to KELER. • KELERmatches theSettlement Instructions.

  8. The settlement process 2/3 • Seller (or his ISP) transfers the sold CO2 units to KELER Registry account. • Buyer (or his ISP)transfers the price of the units to KELER’s cash account. • KELERchecks coverage on both the CO2 and cash accounts. If it is successful, • KELER transfers the CO2unitsto the Buyer’s ISP’s Registry account and parallel to that

  9. The settlement process 3/3 • transfers the money to the Seller’s ISP’s cash account. • In case of an unsuccessful matching or coverage check, CO2 and cash rearrangement between KELER and the Seller & Buyer takes place. • Seller & Buyer receive information about the status of the settlement from their ISP.

  10. How can the service be used? Individuals and legal persons or organizations without legal entity (i.e. any operator) can use the service through ISPs that have special Agreements with KELER for this purpose.

  11. Future plans • It is expected that the Budapest Stock Exchange will listCO2 on its market; Stock Exchange deals are always settled through KELER using the DVP mechanism. • It is possible that for the State auctions of CO2 units the Stock Exchange infrastructure will be used – also with a DVP settlement through KELER.

  12. Start of KELER’s DVP settlement service End of 2005 or beginning of 2006, when: • the Hungarian National Registry will start its operation. • operators will receive their CO2 units from State. • KELER, the ISPs and other participants will open their accounts in the Registry. • ISPs sign the corresponding Agreement with KELER.

  13. Further information Central Clearing House and Depository (Budapest) Ltd. 9-11 Asbóth street Budapest 1075, Hungary Kristóf Matuszka tel.: +36-1-483-6171e-mail: matuszka.kristof@keler.hu Csaba Sarok tel.: +36-1-483-6203e-mail: sarok.csaba@keler.hu

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