Open interest in March and June 2013 European Union carbon futures plunged yesterday on risks associated with converting Phase 2 permits into Phase 3.
The open interest in March futures dropped 27 percent to 28.4 million metric tons from a record 36.3 million on Aug. 14, while for June it fell 31 percent to 25.1 million tons, according to data from the ICE Futures Europe exchange in London, the biggest exchange for carbon trading.
Traders may be unwinding positions because of the conversion risks, said Tom Greenwood, an analyst in London for Ideacarbon, which rates emission credits. Trading in both months yesterday surged to records on ICE.
“If you arbitraged the March-June time spread, you could be in trouble because you’ll get a Phase 2 EU allowance delivered from the March contract you’ve bought, but you may not be able to use it for delivery on the June contract you sold,” he said today in an e-mailed response to questions. That’s prompted traders to close both positions, Greenwood said.
Yesterday, ICE said it would not accept Phase 2 allowances for delivery into futures contracts after April. Factories, power stations and airlines in the system need to hand in allowances to match 2012 emissions by April 30, 2013. The second phase runs for the five years through this year, with Phase 3 extending until 2020.
The EU will exchange emitters’ surplus Phase 2 permits for Phase 3 no later than the end of June, according to a European Commission questions and answers website. It’s unclear when the conversion of Phase 2 allowances will begin. The last trading day for the June ICE futures contract is June 24.
Unwinding the positions means selling March and buying June, Greenwood said.
“It ultimately involves closing positions in both, so open interest falls in both,” he said.
Traders may have initially bought March and sold June to take advantage of the contango in the carbon market, Greenwood said. Those two contracts were offering a three-month return of 2.8 percent six months ago, which is about 11 percent on an annualized basis, according to ICE data.
Yesterday, the contracts were offering a 3.6 percent spread, or about 14 percent annually.
Open interest is a measure of trading positions that have not been closed or delivered.
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