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ECX ECX ICE Futures ECX Carbon Financial Instrument Futures Contract GETTING STARTED © Copyright Intercontinental Exchange, Inc. 2006. All Rights Reserved. August 14, 2006
Transcript

ECXECX

ICE Futures ECX Carbon FinancialInstrument Futures Contract

GETTING STARTED

© Copyright Intercontinental Exchange, Inc. 2006. All Rights Reserved.

August 14, 2006

ICE Futures ECX CFI Futures Contract – Getting Started Page 1

Contents

Section 1 Introduction. 3 Section 2 ICE Futures ECX CFI Futures Contract specifications: 4 - How delivery takes place;

- Fees; - The role of LCH.Clearnet Ltd.

Section 3 How to trade the ICE Futures ECX CFI Futures Contract: 7 - ICE Futures Membership;

- Requirements for Membership; - The process of becoming a Member; - The role of the Responsible Individual; - Order-routing as a client of a Member; - Membership list.

Section 4 Accessing the ICE Platform: 11 - Web ICE;

- Independent Software Vendors; - Back Office systems.

Section 5 Accessing ICE Futures prices. 12 Section 6 Contact details. 13 Appendix 1 Contract specifications. 14 Appendix 2 ICE Futures ECX CFI Futures Contract: Using the EFP

facility. 16

Appendix 3 Fee Schedule. 20 Appendix 4 ICE Futures ECX CFI Futures Contract: Access for non-ICE

Futures Members. 21

Appendix 5 Checklist for access to the ICE Futures ECX CFI Futures Contract.

23

Appendix 6 Technical specifications for Web ICE. 24

ICE Futures ECX CFI Futures Contract – Getting Started Page 2

1. Introduction The ICE Futures ECX Carbon Financial Instruments Futures Contracts (ICE ECX CFI Futures) will be listed by and traded on ICE Futures. Trades will be cleared through LCH.Clearnet Ltd. (LCHC). ECX CFI futures are advanced, low-cost and financially guaranteed tools for trading in the European Union’s Emissions Trading Scheme (EU ETS).

The ICE ECX CFI Futures are designed to facilitate the trading, risk management, hedging and physical delivery of emission allowances in the nascent EU ETS. Under the terms of a Cooperation and Licensing Agreement, ICE Futures has been working together with the European Climate Exchange (ECX) in relation to ICE ECX CFI Futures. ECX is the European sales and marketing arm of the Chicago Climate Exchange.

The purpose of this “Getting Started” document is to give you all of the information which you need in order to get ready to trade ICE ECX CFI Futures. This “Getting Started” document outlines information about: ICE ECX CFI Futures specifications; Exchange fees; The role of LCHC; How to trade ICE ECX CFI Futures on ICE Futures:

- as a Member; - by order-routing as a client of a Member;

Connecting to the ICE Platform; and Accessing price information.

If you have any questions about the information provided, or about the ICE ECX CFI Futures, please do not hesitate to contact us. A full list of contact details can be found in Section 6 of this document.

ICE Futures ECX CFI Futures Contract – Getting Started Page 3

2. ICE Futures ECX CFI Futures Contract specifications The contract specifications for ICE ECX CFI Futures were formed after extensive consultation with market participants. The key features of ICE ECX CFI Futures are outlined below and more detailed information about the contract specifications can be found in Appendix 1. Further information is available in the “ICE Futures ECX Carbon Financial Instrument Futures Contract: User Guide.” Unit of Trading One lot of 1000 emission allowances (i.e. 1,000 tonnes of CO2).

Quotation Euro (€) and Euro cent (c) per metric tonne.

Min. Price Fluctuation

€0.05.

Contract months Contracts are listed on a monthly expiry cycle such that 19 contract months are listed from September 2006 to March 2008. Additionally 5 December contracts will be listed from December 2008 to December 2012.

Contract security LCHC guarantees the financial performance of ICE Futures contracts registered in the name of its members.

Trading system Trading will occur on the ICE Futures platform accessible via Web ICE, or through a conformed Independent Software Vendor.

Trading model Continuous trading between 07:00 hours to 17:00 hours.

Settlement prices Trade weighted average during the daily closing period with Quoted Settlement Prices if low liquidity.

Delivery The Contracts are physically deliverable by the transfer of emissions allowances from the Person Holding Account of the Selling Clearing Member at a Registry to the Person Holding Account of LCH.Clearnet (LCHC) at a Registry and from the Holding Account of LCHC at that Registry to the Holding Account of the Buying Clearing Member at a Registry. There is a delivery period of 3 days after the last trading day.

As with other ICE Futures contracts, Block Trade (i.e. large trades or complex strategies over 50 lots), Exchange for Physical (EFP) and Exchange for Swaps (EFS) facilities will be available for ICE ECX CFI Futures. The EFP facility may be of particular interest to market participants as it allows, in accordance with ICE Futures Regulations, over-the-counter (OTC) trades to be brought on to ICE Futures in order to benefit from ICE Futures clearing and settlement mechanism (outlined below). For further information on this mechanism, please see Appendix 2. How delivery takes place? In simple terms, delivery under ICE Futures Regulations is effected by the transfer of allowances from the Selling Clearing Member’s account to an LCHC account held in one of the National Registries and then on to the Buying Clearing Member. The delivery mechanism is as automated as possible (the electronic interface to the National Registries envisaged by the Registry Regulations will be integral to increasing the efficiency of this process). This delivery mechanism can be represented schematically as follows:

ICE Futures ECX CFI Futures Contract – Getting Started Page 4

1

Delivery mechanism

LCH. Clearnet Account

ICEFutures Clearing

Member’s Account

Buyer’s Account

ICE Futures Clearing

Member’s Account

Seller’s Account

Community Independent Transaction Log

LTD +3

Registry 2 Registry 1 Registry 3

Further information about the delivery mechanism can be found in the “ICE Futures ECX Carbon Financial Instrument Futures Contract: User Guide.” Fees If you are an ICE Futures Member, the ICE Futures transaction fee will be €2.00 per lot per side (including Block Trades, EFPs and EFSs). The ICE Futures transaction fee for all other business (i.e. order routing customers and client business) will be €2.50 per lot per side. The LCHC clearing fee will be €2.00 per lot per side. The role of LCHC The role of LCHC is to guarantee financial and, as far as possible, physical performance of ICE ECX CFI Futures to its members. In futures contracts the LCHC plays a vital role as it becomes - through a process called novation - the seller to every buyer, and the buyer to every seller to every contract. Therefore, a Member’s counterparty risk is to LCHC rather than its counterparty. LCHC has a default fund of over £570 million and through margin calls ensures that it retains sufficient funds to cover the positions which it takes. Margin calls at the LCHC take two forms - initial margin (which is called up-front and will be passed through the ICE Futures Clearing Member) and variation margin (calculated on a daily basis as positions are marked-to-market in order to reflect daily price movements). Holders of open futures positions can be required to post additional funds to their margin account if significant price changes occur. Should LCHC require such additional funds, you will be called directly (if you are a member) or by your broker. If your position generates a gain you may be able to withdraw any excess funds from your account. More information on the LCHC can be found at: www.lch.com/risk_and_margining/

ICE Futures ECX CFI Futures Contract – Getting Started Page 5

LCHC has announced that the margin rates for the IPE ECX Carbon Financial Instruments futures Contract are as follows:

Margin rate (also known as scanning range) €3,500 per lot Inter-month spread charge €1,900 per lot

LCHC has also introduced a discount rate/tiering structure to the calculation of initial margin as set out in the following table:

Discount Rate / Tier Structure* Contract

Code Contract Scanning Range Tier 1 Tier 2 Tier 3 Tier 4 Tier 5

1.00 0.80 0.90 1.00 ECF ECX CFI Futures € 3,500

Sep 06 Dec 06 Jan 07 to Mar 07

Apr 07 onwards

As a result, the initial margin rate for 1 lot of the Dec 06 contract month would be €2,800 (€3,500 x 0.80). At present there are no inter-commodity spreads or spot month top up margin applied. LCHC reserves the right under LCHC Regulations and Procedures to amend margin rates. .

ICE Futures ECX CFI Futures Contract – Getting Started Page 6

3. How to trade ICE Futures ECX CFI Futures Contract In simple terms, there are two main ways of accessing ICE Futures to trade ICE ECX CFI Futures:

(i) either as an ICE Futures Member; or (ii) by order-routing as a client of an ICE Futures Member.

If you chose to become a Member of ICE Futures (either clearing or non-clearing), you will need to go through the membership application process. Alternatively, if you choose to order route as a client of an ICE Futures Member, then in this situation, you do not need to become an ICE Futures Member in your own right and the ICE Futures Member (usually a Clearing Member) will facilitate your access. The choice of access route will be dependent on, amongst other things, cost, regulatory status and expected volume of trading. You are advised to seek your own legal, tax, and regulatory advice prior to making the decision. ICE Futures Membership Under the ICE Futures membership structure there are three categories of Member: General Participant. General Participants may trade on their own account and on behalf of clients.

A General Participant who is a member of LCHC (Clearing Members) will be permitted to clear their own business, client business and business for non-Clearing Members. General Participants who are not Clearing Members will need to put in place a Clearing Agreement with a Clearing Member. General Participants who are Clearing Members must have a net worth requirement of £5 million. There is no net worth requirement for non-clearing General Participants;

Individual Participant. Individual Participants are individuals or sole traders trading only on their

own account. Individual Participants will need to put in place a Clearing Agreement with a Clearing Member. There are no net worth requirements imposed by the Exchange, although they will need to prove their creditworthiness to their clearing Member; and

Trade Participant. Trade Participants are limited to trading on their own account. Trade

Participants may be Clearing or non-Clearing Members, although they are restricted to clearing proprietary business only. Trade Participants who are not Clearing Members will need to put in place a Clearing Agreement with a Clearing Member. Trade Participants who are Clearing Members must have a net worth requirement of £5 million. There is no net worth requirement for non-clearing Trade Participants.

Membership of ICE Futures under the existing membership structure will entitle companies to trade in all of the ICE Futures products other than the ICE ECX CFI Futures (access to which is subject to holding an Emissions Trading Privilege). Companies will also be able to apply to ICE Futures for membership to trade in ICE ECX CFI Futures only. Requirements for Membership An applicant for Membership of ICE Futures must: (a) satisfy the ICE Futures that it is fit and proper;

ICE Futures ECX CFI Futures Contract – Getting Started Page 7

(b) maintain a properly established office (in a location which is acceptable to ICE Futures as it may determine in its absolute discretion) for the conduct of its business on ICE Futures;

(c) provide details of the location of Responsible Individuals (RIs) and ensure that such details (and any related information including order routing) are advised to ICE Futures upon request throughout the period of membership;

(d) be able to demonstrate, to the satisfaction of ICE Futures that it has adequate systems and controls in place to ensure that all employees, agents and representatives who may act on its behalf or in its name in the conduct of business on ICE Futures are fit and proper with suitable qualifications and experience and adequately trained and properly supervised to perform such functions;

(e) be a clearing member of the LCHC or be accepted for such membership or be a party to, or satisfy ICE Futures that it will become a party to, a clearing agreement with a Clearing Member;

(f) be a party to an Electronic User Agreement which is in full force and effect; (g) where relevant, be authorised or otherwise exempt, licensed or permitted by the appropriate

regulatory body to conduct business on the Market; (h) hold all necessary licences, authorisations and consents, or benefit from available exemptions, so

as to allow it to carry on business as a Member on the ICE Platform in accordance with all applicable laws and regulations;

(i) satisfy ICE Futures that it enjoys the financial standing suitable for admission to membership supporting its claim by a copy of the last 3 year’s (and thereafter the latest) audited accounts or such evidence as the Directors may require; and

(j) satisfy such of the requirements of ICE Futures as they may stipulate, supplying such documents in support as ICE Futures requires.

All applicants based in the UK who are conducting ‘investment business’ as defined by the Financial Services and Markets Act 2000 (FSMA) must be authorised and regulated by the Financial Services Authority unless they can benefit from one of the exemptions under FSMA. Overseas Members must have the appropriate regulatory status in the jurisdiction of their incorporation. You are advised to seek legal advice on your regulatory status. The process of becoming an ICE Futures Member In procedural terms, the Applicant will need to: Complete the following forms:

Application for Participant Membership Form; Electronic User Agreement; Membership of LCHC (or applying for Membership) – Clearing Members only; Clearing Agreement – Non-Clearing Members only; Assign at least one Responsible Individual (RI) to trade. Further information on RIs is set out

below. Pay the application fee and annual subscription.

The ICE Futures Membership Department will process the application as quickly as possible – in general this process will normally take between 4 and 12 weeks - and carry out the necessary due diligence. All applications will need to be approved by the ICE Futures Authorisation, Rules and Conduct Committee. The ICE Futures Regulations are available at: https://www.theice.com/contract_regulations.jhtml

ICE Futures ECX CFI Futures Contract – Getting Started Page 8

The role of the Responsible Individual

A Responsible Individual (RI) is responsible for all business conducted under an Individual Trader Mnemonic(s) (ITM) assigned to him by ICE Futures and must ensure to the best of his ability, that all business submitted through his ITM(s) complies with ICE Futures Regulations and other appropriate regulatory requirements. The Responsible Individual is not required to be a trader - at the Member's discretion he may fulfil a supervisory role if the Member considers the individual to be adequately trained and have the relevant experience to control all orders submitted under the ITM(s) at all times. Where a Member has granted a client access to an ITM via an Order Routing System, it is the Member's responsibility to vet the client appropriately. Further, it is the responsibility of the Responsible Individual to whom the ITM is assigned to supervise the orders entered by the client. In order to become an RI, an individual should to successfully complete a web-based tutorial and the RI examination. The RI must also complete an RI form. Order-routing as a client of an ICE Futures Member The second method by which to access ICE Futures trading platform is by order-routing as a client of an existing Member. In this situation, you do not need to become a Member, and the relationship governed is by Terms of Business between yourself and the Member. Key points to note about order-routing access: you will need to complete a Terms of Business provided by the Member; the Member will ask you to deposit margin or security with them in order to meet the LCHC’s initial

margin calls for your positions; the Member will provide you with electronic access to ICE Futures in order to trade ICE ECX CFI

Futures (either WebICE or an ISV solution as set out below); once set-up, you will have direct electronic execution ability in ICE ECX CFI Futures; trades are registered with LCHC in the name of the Clearing Member and the client remains

anonymous; access may be restricted subject to jurisdictional restrictions; and the ICE Futures Member may charge you clearing and/or brokerage charges in addition to ICE

Futures and LCHC fees. In order to be set-up as an order-routing client, the first step is to select an ICE Futures Member who is appropriately regulated in order to act as a broker or Clearing Member and who will support ICE ECX CFI Futures. This may be the brokerage arm of entities that currently provide financial services to your company in other ICE Futures products, or you can seek referrals from others who participate in futures markets. It may be useful to consider several different brokers to establish an appropriate level of comfort. A simple guide to order-routing is available at Appendix 4. Checklist A checklist for accessing ICE Futures for the trading of ICE ECX CFI Futures is available at Appendix 5.

ICE Futures ECX CFI Futures Contract – Getting Started Page 9

ICE Futures Membership list At the time of writing, the following ICE Futures Members are able to trade in ICE ECX CFI Futures. Those Members annotated with an asterix (*) have indicated to ICE Futures that they will be able to offer order-routing services in ICE ECX CFI Futures to clients: ABN AMRO Futures Ltd.* ADM Investor Services International Ltd.* Amerex Futures Ltd* Atel Trading Bache Financial Ltd.* Banco Santander Central Hispano S.A.* Barclays Capital* Bear Stearns International* BHF-Bank AG* BNP Paribas Commodity Futures Ltd.* BP Gas Marketing Calyon Financial SNC* CEZ A.S. Citadel Equity Fund Ltd. Climate Change Capital Ltd. Credit Suisse Securities (Europe) Ltd.* Deriwatt AG Deutsche Bank AG* Dresdner Bank AG, London Branch* E.ON UK E&T Energie Electrabel SA Endesa Generacion SA Fimat International Banque S.A. (UK Branch)* Fortis Bank Global Clearing N.V. (London Branch)* Goldman Sachs International* HSBC Bank plc.* ICAP Securities Ltd. JP Morgan Securities Ltd.* Jump Trading LLC Kyte Broking Ltd. Lehman Brothers International (Europe)*

MBF Clearing Corp. Madison Tyler Trading LLC MAN Financial Ltd.* Marex Financial Ltd.* Marquette Partners (UK) Ltd. Merril Lynch Commodities (Europe) Ltd. Merrill Lynch International* Mizuho Securities USA Inc. Monument Securities Ltd. Morgan Stanley & Co. International Ltd.* Natexis Commodity Markets Ltd.* Optiver US LLC Optiver VOF Rand Financial Services Inc. RBC Capital Markets Corporation R.J. O’Brien & Associates Inc. Saxon Financials Ltd. SEB Futures, a Division of Skandinaviska Enskilda Banken AB* Sempra Energy Europe Ltd. Shell Energy Trading Ltd. Shell International Trading and Shipping Co. Ltd SmartestEnergy Ltd. Spectron Energy Services Ltd. Starmark Trading Ltd. TFS Derivatives Ltd. The Kyte Group Ltd. ThyssenKrupp AG Total Gas and Power Tradelink LLC UBS Ltd.* Universal Data (UK) Ltd. Xconnect Trading Ltd.

.

ICE Futures ECX CFI Futures Contract – Getting Started Page 10

4. Accessing the ICE Platform The ICE Futures Contracts are hosted on the ICE Platform. The ICE Platform can be accessed in two ways: either through the ICE Future proprietary front-end – known as ‘Web ICE’ or through one of the Independent Software Vendors (ISVs) who have ‘conformed’ to the ICE Futures Applications Program Interface. Members may also develop their own application to connect to the ICE Platform. Web ICE Web ICE is the ICE Futures proprietary web-based front-end. In order to access the ICE ECX CFI Futures, you will need to ensure that your pc network has the correct technical specifications. Independent Software Vendors An alternative approach to accessing the ICE Platform, is to use an ISV which will provide access to the ICE Futures markets (as well as a number of other markets). If you are order-routing through an ICE Futures Clearing Member, your Clearer may facilitate your access through an ISV. ISV front-end functionality allows a Member’s clients to route their orders directly to the Member, and under the RI’s control, quickly to the market. In order to ensure that the ISV front-end provides the basic, required functionality to access the ICE Platform and further does not impair the ICE Futures operation, ICE Futures has introduced a conformance testing programme. Conformed ISVs include Easyscreen, Ffastill, GL Trade, ION Trading, Nyfix, Patsystems, RTS and Trading Technologies. Back Office Systems A number of companies provide middle and back office software to Members. You should contact your software provider directly if you have any questions about using such technology in relation to ICE ECX CFI Futures.

ICE Futures ECX CFI Futures Contract – Getting Started Page 11

5. Accessing ICE Futures prices Real-time prices are available via: the Web ICE or ISV electronic trading screens; ICE Futures EnergyLive; major information and data vendors.

As a result, the price at which a particular contract month is trading can be known instantly by all participants. ICE Futures Market data will be available from these Market Data Vendors:

Vendor Code/Page Bloomberg

MOA

CMS

UX

CQG

UX

E-Signal/Futuresource

LUX

ICE Futures Energy Live LUX

Reuters

0#

IDC

<17>t,UX

Prices, news and market commentary will also be available from Point Carbon, Platts and Argus Media as part of their emissions coverage.

ICE Futures ECX CFI Futures Contract – Getting Started Page 12

6. Contact details If you have any questions about the information provided in this document, please do not hesitate to contact the relevant person from ICE Futures or ECX.

Emissions Project Manager Mark Woodward [email protected] Membership Graham Brailey [email protected] Candace Hurdle ICE Futures Regulations Jackie Ryan [email protected] Data/E-commerce Martin Wadhwani [email protected] Telephone enquiries - +44 (0)20 7481 0643 (Switchboard) +44 (0)20 7481 8485 (Facsimile) Website - www.theice.comPostal address - International House, 1 St Katharine's Way, London E1W 1UY

Chief Executive Peter Koster [email protected] Commercial Director Albert de Haan [email protected] UK Director Phil Brown [email protected] Economist Sara Stahl [email protected] Telephone enquiries +31 20 799 7990 (Switchboard) Website - www.ecxeurope.comPostal address - Zuidplein, XV Amsterdam 0643, The Netherlands

.

ICE Futures ECX CFI Futures Contract – Getting Started Page 13

Appendix 1 – ICE FUTURES ECX CFI FUTURES CONTRACT: CONTRACT SPECIFICATIONS Unit of Trading One lot of 1000 emissions allowances. Each emissions allowance being an entitlement to

emit one tonne of carbon dioxide equivalent gas.

Minimum trading size

1 lot.

Quotation Euro (€) and Euro cent (c) per metric tonne.

Tick size €0.05 per tonne (i.e. €50 per lot).

Minimum/maximum price fluctuation

€0.05/no limit.

Contract months Contracts are listed on a monthly expiry cycle such that 19 contract months are listed from September 2006 to March 2008. Additionally 5 December contracts will be listed from December 2008 to December 2012.

Expiry day Last Monday of the Contract month. However, if the last Monday is a Non-Business Day or there is a Non-Business Day in the 4 days following the last Monday, the last day of trading will be the penultimate Monday of the delivery month. Where the penultimate Monday of the delivery month falls on a No-Business Day, or there is a Non-Business Day in the 4 days immediately following the penultimate Monday, the last day of trading shall be the antepenultimate Monday of the delivery month. The Exchange shall from time to time confirm, in respect of each contract month, the date upon which trading is expected to cease.

Trading system Trading will occur on the ICE Futures electronic trading platform known as the ICE Platform accessible via Web ICE or through a conformed Independent Software Vendor.

Trading hours 07:00 hours to 17:00 hours.

Settlement prices Trade weighted average during the daily closing period with Quoted Settlement Prices if low liquidity.

VAT and taxes The UK’s HM Revenue and Customs have confirmed that the trading of the ICE ECX CFI Futures on the Exchange between the Member and LCH.Clearnet Ltd. (LCHC) has been granted interim approval to be zero-rated for VAT purposes under the terms of the Terminal Markets Order.

Delivery The contracts are physically deliverable by the transfer of emissions allowances from the Holding Account of the Selling Clearing Member at a Registry to the Holding Account of LCHC at a Registry and from the Holding Account of LCHC at that Registry to the Holding Account of the Buying Clearing Member at a Registry. Delivery is between Clearing Members and LCHC during a Delivery Period. The Delivery Period is the period beginning at 19:00 hours on the business day following the last trading day and ending at 19:30 hours on the third business day following that last trading day. There is provision for ‘Late’ and ‘Failed’ delivery within the contract Rules.

ICE Futures ECX CFI Futures Contract – Getting Started Page 14

Clearing and contract security

LCHC acts as central counterparty to all trades and guarantees the financial performance of the ICE Futures contracts registered in the name of its Members.

Margin Variation and initial margin are charged in the usual manner by LCHC.

ICE Futures ECX CFI Futures Contract – Getting Started Page 15

Appendix 2 – ICE FUTURES ECX CFI FUTURES CONTRACTS: USING THE EXCHANGE FOR PHYSICAL FACILITY

ICE Futures offers an Exchange for Physical (EFP) facility for participants in the emissions markets to use the ICE ECX CFI Futures to separate the price of carbon from the supply of EU emissions allowances and, most importantly, enable counterparties to benefit from the security provided from the ICE Futures delivery mechanism. The EFP facility has been used increasingly by ICE Futures Members and their clients in other markets to successfully mitigate their OTC risk exposures by bringing these positions on-exchange. EFPs work on the basis that the counterparties agree that they wish to complement or transfer a natural physical or OTC position with an on-exchange futures position. If the counterparties are ICE Futures Members, they can advise ICE Futures directly, or if not they will ask their Clearing Member or brokers to register the transactions with ICE Futures on their behalf. What are the benefits of using the EFP facility? There are several ways in which EFPs can be useful for market participants, where they can be used to initiate futures positions, close out futures positions and open or close out OTC positions. The advantages of EFPs are best illustrated by example. Described overleaf are two examples which demonstrate how EFPs might be used by participants in the emissions market. Key points to note about EFPs The ICE Futures Rules contain a number of requirements in relation to EFPs, most notably that: all EFPs must be underpinned by an underlying physical transaction – in general terms it is

expected that this will be an EFET, IETA or ISDA agreement. The Exchange may request evidence to support the underlying transaction;

EFPs may be reported in respect of any contract month during trading hours and up to 30 minutes after the close of trading (including the expiry day);

EFPs must be reported to the designated Exchange official by fax on the prescribed ICE Futures form;

details of all EFP registrations (except for transaction price) for the current day are recorded by Exchange staff and published on the ICE Platform;

if the price is not at the current market price or is outside those parameters announced by the Exchange from time-to-time, the Exchange must be satisfied that the transaction is a legitimate use of the facility before registration can take place. The Exchange may request evidence to support the underlying transaction. (note: the parameters for ECX CFI futures Contracts will be confirmed shortly);

EFPs are not included in the settlement price calculation. These rules are set out in Section F.5 of the ICE Futures Regulations. Further information was provided in Circular 05/87 dated 27th July in relation to the registration of EFPs and EFSs for IPE ECX CFI futures Contracts. Delivery mechanism for ICE ECX CFI Futures In simple terms, and in order to guarantee as far as possible the physical performance of the contract as well and the LCHC guarantee of financial performance, the core of the ICE Futures delivery model is that

ICE Futures ECX CFI Futures Contract – Getting Started Page 16

LCHC is interposed between the Buyer and Seller (for the purposes of the ICE Futures Regulations, the Buyer’s Clearing Member and the Seller’s Clearing Member). Therefore, the Seller will transfer emissions allowances from his Peron Holding Account in one of the 25 National Registries to LCHC and thence to the Buyer (who will, as appropriate, transfer the allowances to the underlying client). Further information about the ICE Futures delivery mechanism can be found at in the “ICE Futures ECX CFI Futures Contract: User Guide”.

Please contact the ICE Futures with any questions that you may have regarding ICE Futures ECX

CFI futures Contracts: Mark Woodward Phil Brown +44 020 7265 5729 +44 020 7382 7804 [email protected] [email protected]

ICE Futures ECX CFI Futures Contract – Getting Started Page 17

Example 1 – Using an EFP to bring an OTC physical position on-exchange in order to benefit from the ICE Futures delivery mechanism Scenario On 14th January 2006 an oil producer entered into a December 2006 forward contract to sell 200,000 tonnes of CO2 (i.e. 200,000 emissions allowances) to a utility company. This contract was underpinned by an IETA Master Agreement and therefore delivery is due on 20th January 2007 (i.e. the twentieth day of the month following expiry). The parties are concerned about the large number of open positions in the OTC market and whether the “daisy-chains” will unravel to allow delivery to occur within the contract timelines. Therefore, the parties want to swap their open OTC position for an ICE ECX CFI Futures position in order to benefit from the ICE Futures delivery mechanism. How does the EFP work? On 1st November 2006, the counterparties agree that they will bring their OTC position onto ICE Futures using an EFP. Therefore, they ask their brokers to arrange an EFP such that a position in ICE Futures ECX CFI futures Contracts is created which is equivalent to the OTC position – i.e. the major oil producer will open a 200 lot short position in ICE ECX CFI Futures (the lot size is 1,000 emissions allowances) and the utility company will take an equivalent long position. This leg may be registered on ICE Futures at the same price as the OTC transaction. The two parties also agree to reverse out their OTC position. Positions after the EFP Oil producer Short 200,000 tonnes CO2 (Long 200,000 tonnes CO2 – i.e. reverse OTC contract) Short 200 lots Dec 06 ECX CFI futures Contracts Utility Long 200,000 tonnes CO2 (Short 200,000 tonnes CO2 – i.e. reverse OTC contract) Long 200 lots Dec 06 ECX CFI futures Contracts Therefore once the EFP is executed, the oil producer will be short 200 lots ICE ECX CFI Futures and the utility long 200 lots Dec 06 IPE ECX CFI futures Contracts. If this position is held to expiry, the oil company will need to deliver 200,000 emission allowances to its Clearing Member on 18th December 2006 (the last trading day) with the utility company receiving the allowances four days later from its Clearing Member.

ICE Futures ECX CFI Futures Contract – Getting Started Page 18

Example 2 - Using an EFP to open a futures position Scenario A power generator who is long emissions allowances has been approached by a hedge fund who wishes to purchase 250,000 emissions allowances once he secures further funding in one month’s time. The power generator wants to supply the customer, but does not want to commit to a price because he believes the price is going to rise. The hedge fund wants to make a long-term investment in allowances, but does not want to commit to price as he believes that the price is going to fall in the next few weeks before rising in the medium to long term. The power generator and the hedge fund agree to do business via an EFP so that they can retain exposure to the price of carbon while securing each other’s delivery requirements which do not exactly marry with the normal OTC or futures delivery cycle. They agree to take equal and opposite futures positions to that which they are transacting in the physical deal. How does the EFP work? On 1st October 2006, the power generator agrees to sell 250,000 emissions allowances to the customer at the Dec 06 ICE ECX CFI Futures settlement price for that day’s trading. The allowances will be delivered on 1st November 2006. They will also take out equal and opposite positions in the Dec 06 ICE Futures ECX CFI futures Contract at the same price. The two parties advise their brokers that they have agreed this EFP. The two brokers contact each other and register with ICE Futures that this EFP has been agreed and the price. A long position of 250 lots is opened for the power generator and a short position of 250 lots is opened for the hedge fund. Positions after the EFP The 1st October settlement price for Dec 06 ICE ECX CFI Futures is €25.45 per tonne Power generator Short 250,000 tonnes CO2 €25.45 Long 250 lots December ECX CFI futures Contracts €25.45 Hedge fund Long 250,000 tonnes CO2 €25.45 Short 250 lots December ECX CFI futures Contracts €25.45 NB. The allowances are not priced until the futures are sold As equal and opposite positions in the December futures contract have been exchanged for the physical positions, both parties remain exposed to the price of carbon as they were before the physical trade was completed. The parties can then realise this price exposure independently and at a point of their choosing by closing out their futures position by taking an equal and opposite futures position. Therefore, the pricing of the transaction has been separated from the physical trade itself.

ICE Futures ECX CFI Futures Contract – Getting Started Page 19

Appendix 3 - FEE SCHEDULE FOR ICE FUTURES ECX CFI FUTURES CONTRACTS ICE Futures Membership1

For Trading of ECX

CFIs For Trading of ICE

Futures Energy Contracts (optional)

Total for trading both ICE Futures Contracts

and ECX CFIs Applicatio

n fee Annual fee

Application fee

Annual fee

Application fee

Annual fee

Existing ICE Futures Member

n/a €2,5002

(£1,7502) n/a €8,600

(£6,000) n/a €11,1002

(£7,7502) General Participant

New ICE Futures Member

€2,500

(£1,750) €2,500 (£1,750)

€3,600 (£2,500)

€8,600 (£6,000)

€6,100 (£4,250)

€11,100 (£7,750)

Existing ICE Futures Member

n/a €2,5002

(£1,7502) n/a €3,600

(£2,500) n/a €6,100

(£4,250) Trade Participant

New ICE Futures Member

€2,500

(£1,750) €2,500 (£1,7501)

€3,600 (£2,500)

€3,600 (£2,500)

€6,100 (£2,500)

€6,100 (£4,250)

Trading fees: futures Member’s proprietary trades (per side per lot) €2.00 Member’s non-proprietary business (per side per lot) €2.50 Additional fees Market Data fees (per screen per month) $50.003 LCH.Clearnet fees €2.00 Membership fee payment can be accepted in either Euros or pounds sterling. Notes 1 These fees have been calculated using a conversion rate of £1:€1.43. 2 ICE Futures ECX CFI fees are waived for 2005 for existing ICE Futures Members, so the figure in the ‘Total’ column only applies from 2006 onwards. 3 Under the Market Data Policy a $50 per month fee will be charged to all trade-enabled users who have failed to trade within a calendar month as well as non-trade enabled or view-only customers. This charge is levied by ICE Futures irrespective of whether the trading of ICE Futures ECX CFI futures is conducted on the ICE Platform accessed via Web ICE or an Independent Software Vendor. Disclaimer This fee schedule is correct as at the date published. ICE Futures, the European Climate Exchange and LCH.Clearnet Ltd. reserve the right to change fees at any time.

ICE Futures ECX CFI Futures Contract – Getting Started Page 20

Appendix 4 – ICE FUTURES ECX CFI FUTURES CONTRACTS: ACCESS FOR NON-ICE FUTURES MEMBERS

The following is a simple list of steps that you as a non-Member of ICE Futures will need to go through to obtain direct screen access to the ICE Futures markets in order to trade ICE Futures ECX CFI futures Contracts via your chosen clearer:

- Complete commercial arrangements with your chosen clearing member and request that they make arrangements with the Exchange to set you up as an order routing client;

- Your clearer will contact the Exchange to request that you are set up in the trading systems. As

the User you will need to provide your clearer with the primary contacts for trading, credit and IT. You will also need to appoint a ‘Super User’ for administrative purposes. Your clearer will retain an administrator status and therefore, all user additions, modifications or deletions should come to the Exchange via your administrator;

- Once the Exchange has all the relevant information from your clearer, the Exchange will

permission your traders to access the Exchange markets. At this stage your traders will not yet be enabled to trade;

- As the client, your assigned Super User will use Counterparty Filter, an internet based

application, to request trader accounts for your traders from your clearer. With this done your clearer can set up each account with the necessary risk limits. Your clearer will do this through an application known as Clearing Admin;

- Once your accounts have been enabled by your clearer you are almost ready to trade. The last

step is for your Super User to assign the enabled accounts to your traders. Once again this is carried out using the Counterparty Filter application. With the process complete, your traders will be automatically enabled with trading rights – they can now log on to the trading application and trade.

The Exchange can assist with training on any of the applications mentioned above.

Feel free to contact the ICE Futures with any questions that you may have regarding the ICE Futures ECX CFI Futures Contract: Mark Woodward Phil Brown +44 020 7265 5729 +44 020 7382 7804 [email protected] [email protected]

ICE Futures ECX CFI Futures Contract – Getting Started Page 21

Make a request for your clearer to enable you with

direct market access. Your clearer will supply ICE Futures with the

contact details of your intended users.

ICE Futures will permission all intended users with access to the

relevant ICE Futures markets. You will receive

You are now able to request trading accounts

from your clearer. This is done using the

Counterparty Filter application

Your clearer will now enable the requested accounts and set risk

limits for each account. Your clearer will do this

using the Clearing Admin application.

You are now able to associate the enabled

accounts to your traders using the Counterparty

Filter application.

Your traders can now log on to the trading

application and trade!

Make commercial arrangements with your

chosen clearing member to trade the ECX CFIs

ICE Futures ECX CFI Futures Contract – Getting Started Page 22

Appendix 5 – CHECKLIST FOR ACCESS TO IPE ECX CFI FUTURES CONTRACTS

ICE FUTURES Membership Order-routing access

[] Applicant for Participant Membership Form

[] Select ICE Futures Clearing Member

[] Electronic User Agreement

[] Agree Terms of Business

[] Clearing Agreement (Non-Clearing Members only)

[] Deposit margin/security with Clearer

[] Membership of LCH.Clearnet (Clearing Members only)

[] Ensure your traders have Web ICE/ISV access

[] Pay application fee and annual subscription

[] Web ICE / ISV access

[] Complete and return RI forms for all traders.

ICE Futures ECX CFI Futures Contract – Getting Started Page 23

Appendix 6 – Technical specifications for Web ICE

In order to access the ICE Platform via Web ICE, your pc network needs to have the following technical specifications:

• Microsoft Windows 2000 Professional / XP Professional with latest patches • Pentium III, 1.5GHz CPU or better • 1 GB Total Memory / 128 MB of Available memory when running WebICE and all other user

applications • SUN Java Plug In - 1.4.2_06 or higher • Internet Explorer (IE) Browser version 6.0 or above. • High End Video Card with 32 MB per display of video memory • 17" monitor with resolution set to 1280 x 1024 and a refresh rate of 80 Hz or greater • Network card (NIC) with 10/100 interface - set to 100 full duplex speed for networks that allow

100 Mbps data flow. Please note that "auto-detect" or "hardware default" settings should never be used.

Further information can be found in the “Client Connectivity: General Recommendations” document available at: https://www.theice.com/ice_platform.jhtml


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