The Carbon Market How to Trade ECX Emissions Contracts March 2008

The Carbon Market

How to Trade ECX Emissions Contracts

March 2008

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Contents

About ECX

About The Market

Why Trade on Exchange

How to Trade

Members List

Contract Specifications

OTC Clearing

Fees & Margin

Indices

Appendices

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About ECX

European Climate Exchange is the most liquid marketplacefor trading CO2 EU Allowances (EUAs) under the EUEmissions Trading Scheme. ECX is part of the Climate Exchange Plc group of companies, listed on AIM of the London Stock Exchange.

• ECX CFI (Carbon Financial Instrument) contracts are:– Listed & traded on ICE Futures Europe electronic platform, a

Recognized Investment Exchange– Regulated by the Financial Services Authority– Financially guaranteed by LCH.Clearnet

• ECX CFI contracts include:– Futures Contracts on EUAs (launched April 2005)– Options Contracts on EUAs (launched October 2006)

• ECX will launch CER Futures on Friday, 14 March 2008 and CER Options Contracts on Certified Emission Reductions (CERs) shortly thereafter.

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About ECX

Sources: ECX, Nord Pool, Bluenext, EEX.

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EUA Volume Exchanges Feb 2008

ECX83%

Nordpool12%

Bluenext 1%

EEX4%

ECX Nordpool Bluenext EEX

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About the Market

• Volumes grow rapidly in the European Carbon Market– 260 million tonnes CO2 traded in 2005– 800 million tonnes CO2 traded in 2006– 1,500 million tonnes CO2 traded in 2007

• Increasing numbers of market participants in OTC and Exchange markets

• Growing activity boosting sophisticated products(spot, forwards, futures swaps, structured products, options)

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Who is the Carbon Market?

Number of companies

Utilities

Cement

Steel

Pulp and paper glass Oil

Speculative traders

Hedge funds

Banks

Other

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Market product sophistication

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Market ParticipantsGeographic Location

Less familiar with derivative products

Familiar with derivative products

Central – Eastern Europe

Southern Europe

Western Europe – UK

Northern Europe

International

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Number of companies

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Price and volume ECX CFI Futures Contracts• 94 million tonnes of CO2 traded in 2005 with a market value of €2.1 billion• 452 million tonnes of CO2 traded in 2006 with a market value of €9 billion• 1 billion tonnes of CO2 traded in 2007 with a market value of €17.5 billion

ECX CFI Contracts Monthly Volume

0

20

40

60

80

100

120

140

160

180

Apr-05Jun-05

Aug-05Oct-0

5

Dec-05

Feb-06Apr-0

6Jun-06

Aug-06Oct-0

6

Dec-06

Feb-07Apr-0

7Jun-07

Aug-07Oct-0

7

Dec-07

Feb-08

DATE

VO

LU

ME

(m

illi

on

to

nn

es C

O2)

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Set

tlem

ent

Pri

ce (

€)

ECXFutures

ECXOptions

EUA Dec-08 Sett

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Open Interest & Volume ECX CFI Options Contracts109 million tonnes of CO2 have traded in options on ECX / ICE Futures Europe

since launch October 2006

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

Vo

lum

e (t

on

nes

CO

2)

Oct-06

Nov-06Dec-06

Jan-07Feb-07

Mar-07

Apr-07

May-07Jun-07

Jul-07

Aug-07

Sep-07Oct-0

7Nov-07

Dec-07Jan-08

Feb-08

Date

ECX CFI Options Volume Calls Puts

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

Vo

lum

e (m

t C

O2)

Date

Monthly Options Open Interest Calls Puts

10

Open Interest

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ECX CFI Futures Contracts Open Interest currently rests at 148 million tonnes

ECX EUA Futures Open Interest Breakdown

0

20

40

60

80

100

120

140

160

180

200

DATE

VO

LU

ME

(mill

ion

ton

nes

CO

2)

Mar-08

2006

2007

2008

2009

2010

2011

2012

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Why Trade on an Exchange?

Low cost

One centralisedpool of liquidity

Easy & efficient

Transparency

Credit risk management

Regulated and secure market

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How to Trade ECX Products

• There are two ways to access the market :

– Become a Member in ECX CFI on ICE Futures; or

– Order-Route as a customer of a Clearing Member on ICE Futures

• Access route decision will be driven by:– Nature of company– Type of trading activity– Volume of trading activity– Regulatory status

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Members List

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Clearing Members

ECX CFI Clearing Members of ICE Futures able to offer clearing and trading services to third parties (‘order-routers’).

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ICE ECX Screen Shot

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Contract Specifications ECX EUA Futures Contract

1 lot / contract (= 1000 tonnes CO2 EU allowances)Minimum Trading Size

Trading will occur on ICE Futures electronic trading platform(known as the ICE Platform) which is accessible via WebICE or through a conformed Independent Software Vendor.

Trading system

07:00 to 17:00 UK Local Time (02:00 to 12.00 EST)Standard Trading hours

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

Clearing & Contract Security

Trade weighted average during the daily closing period (16.00-16.15 UK Local Time) with Quoted Settlement Prices if low liquidity.Settlement prices

Contracts are physically settled by transfer of allowances from seller’s account to buyer’s account via clearing member account and LCH.Clearnet. Delivery takes place three days after last trading day.

Settlement & Delivery

€0.01Tick Size

Monthly contracts for Phase I up to March 2008. Annual contracts with December expiry for Phase II (2008-2012)Contracts listed

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Contract Specifications ECX EUA Options Contract

Trading will occur on ICE Futures electronic trading platform(known as the ICE Platform) which is accessible via WebICE or through a conformed Independent Software Vendor.

Trading System

A range of strike prices are automatically listed for each contract month covering the price range from €1.00 – €55.00. The Exchange may add one or more strike prices nearest to the last price listed as necessary. Strike price intervals are €1.00.

Quotation

07:00 to 17:00 UK Local Time (02:00 to 12.00 EST)Standard Trading Hours

European-style. Premiums are paid at the time of the transaction. Option Style & Premium



Trade weighted average during the daily closing period (16.00-16.15 UK Local Time) with Quoted Settlement Prices if low liquidity.

Settlement Prices

ECX CFI Options Contracts turn into ECX CFI Futures Contracts at expiry (which are physically settled contracts) 3 business days before the expiry of the relevant ICE ECX CFI Futures Contract.


€0.01 (tick size capability up to 3 decimal places)Tick Size

1 lot / contract ( = 1000 tonnes CO2 EU allowances)Minimum Trading Size

Front two contract months plus next 6 December contract months (currently Mar08, Dec08, Dec09, Dec10, Dec11 and Dec12). Please note that only listed contract months are eligible for clearing OTC options contracts (EFS).

Contracts Listed

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Contract Specifications ECX CER Futures Contract

One lot of 1000 certified emission reduction units (CER) (i.e. units issued pursuant to Article 12 of the Kyoto Protocol and the decisions adopted pursuant to the UNFCCC to the Kyoto Protocol with the exception of allowances generated by hydroelectric projects with a generating capacity exceeding 20MW, LULUCF activities and nuclear facilities). Each CER being an entitlement to emit one tonne of carbon dioxide equivalent gas.

Unit of Trading

1 lot / contract (= 1000 tonnes Certified Emission Reduction units)Minimum Trading Size

07:00 to 17:00 UK Local Time (02:00 to 12.00 EST)Standard Trading hours



Trade weighted average during the daily closing period (16.00-16.15 UK Local Time) with Quoted Settlement Prices if low liquidity.Settlement prices

Contracts are physically settled by transfer of CERs from seller’s account to buyer’s account via clearing member account and LCH.Clearnet. Delivery takes place three days after last trading day. The Exchange will, from time to time, issue a list of Registries from which LCHC will accept and will deliver CERs. Initially, this will be restricted to the UK Registry.


€0.01 per tonne (i.e. €10.00 per lot)Tick Size

Contracts are listed on an quarterly expiry cycle such that 17 contract months are listed from December 2008 to December 2012 on a March, June, September and December cycle. Contracts listed

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OTC ClearingThe EFP/EFS Mechanism

• The Exchange for Physical (EFP) and Exchange for Swap (EFS) mechanisms can be used by participants in the emissions markets who wish to avoid OTC risk exposure, by registering their positions with the Exchange for clearing by LCH.Clearnet.

• The EFP facility is used to clear OTC forward contracts and the EFS facility to clear OTC option or swap contracts.

• Both counterparties must have a clearing agreement in place with one of the ECX CFI Clearing Members on ICE Futures. The counterparties agree to cancel their OTC position and novate it into an exchange futures position.

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Fee StructureECX CFI Futures and Options Contracts

Membership fees

€2,500

€2,500 per annum

Application fee

Annual fee

LCH.Clearnet Clearing fee

€1.50 per lot per side (€.0015 per tonne)All business (inc. Blocks, EFPs and EFSs)

€2.00 per lot per side (€0.002 per tonne)

€2.50 per lot per side (€0.0025 per tonne)

Members

Order-routers and other business(inc. Blocks, EFPs and EFSs)

Exchange fee

AmountFee type

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Margin Rates ECX CFI Futures and Options Contracts

• Margin comes in two forms: Initial and Variation Margin

- Initial margin is a returnable good faith deposit required whenever a futures or options position is opened. The money is returned when the position is closed out or expires (goes to delivery)

- Variation Margin represents the profit/ loss in a position each day. LCH.Clearnet calculates the profits/ losses sustained on each position at the end of day– NOTICE: The outright initial margin for ECX CFI Feb’08- Mar’08 Futures and

Options Contracts is currently €550 per lot (€0.55 per tonne)

€600 (€0.60 per tonne)

€2200 (€2.20 per tonne)

ECX CFI futures Contracts (per lot) as per February 2008

Inter- month spread

Outright

Initial margin

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ECX Indices Morning Marker & Emissions Index

ECX Emissions Morning Marker– A trade-weighted average of all ECX CFI futures trades within 15

minute period from 9.00 –9.15 UK Local Time. Published shortly after 9.15 UK Local Time for the Mar 08, Dec 08, Dec 09 and Dec 10 contract months.

ECX Emissions Index– A trade-weighted average of all ECX CFI futures trades over the

course of the trading day. Published shortly after 17.00 UK Local Time for the Mar 08, Dec 08, Dec 09 and Dec 10 contract months.

• ECX indices are used by the market as benchmarks but are not tradable

• Available on www.ecx.eu (under Market Data) BACK TO CONTENTS

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Other Information Authorised Data Vendors and VAT

Information Vendors to follow real-time ECX CFI data:- Bloomberg (EMIT for futures, tab 92), (OMON for options) - Reuters- futures: (0#CFI:) options: (CFI+) Calendar Spreads: (#CFI2Y)- CMS (UX)- CQG (UX)- E-Signal/Future Source/Comstock (LUX) - IDC (<17>t, UX)- ICE Energy Live (LUX)

VAT:VAT of EUAs will be paid by the Buyer in the country where the Buyer islocated. Transfers of EUAs between the Member and LCH.Clearnet willbe zero-rated for VAT purposes.

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Delivery Mechanism

Seller’sAccount

EUAs are held in dematerialized form in National Registries connected to the CITL (EU Registry). The accounts refer to the National Registry account where the entity wishes to make / take delivery.

Seller’s Clearing Member’s Account

LCH.Clearnet Account

Buyer’s Clearing Member’s Account

Buyer’sAccount

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Contacts

Thank you for your time

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Patrick Birley Chief Executive OfficerTel: +44 (0)207 382 [email protected]

Albert de HaanCommercial DirectorTel: +44 (0)207 382 [email protected]

Sara StahlBusiness Development ManagerTel: +44 (0)207 382 [email protected]

www.ecx.eu

Henry BakkerData & Communications OfficerTel: +44 (0)207 382 [email protected]

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Appendices

How to Access the Market

How to Become an Order-routing Client

How to Become a Member

Membership Categories

Trading Software Vendors

Delivery Mechanism Details

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How to Access the Market

General Participant

Trade Participant

Clearing

Non- Clearing

Clearing

Non- Clearing

ICE Members

Order-routingcustomers

Non-members:

Enabled to trade ECX CFI

Products

ICE Futures Contract sets

Oils

Utilities

Emissions Trading Privilege

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How to Become an Order-routing Client

• No need to apply for ICE Futures Europe membership• Client signs Terms of Business with Clearer• Clearer provides either WebICE or ISV (Independent Software

Vendor) solution for trading• Client has direct electronic execution ability onto the ICE platform

for the trading for ECX CFIs• Trades are registered with LCH.Clearnet in name of clearer and

client remains anonymous• Access via a broker will be arranged

between broker and Clearing Memberand brokerage fees will be charged

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How to Become an ECX CFI Member of ICE Futures Europe

Complete:a) Application Form;b) Electronic User Agreement (EUA)c) If Clearing Member: Have or be in the process of

securing membership of LCH.Clearnet; orIf Non-Clearing Member: Clearing Agreement;

d) Assign at least one Responsible Individual (RI) to trade;

e) Application processed and formally presented to the ICE Futures’ Europe Authorisation, Rules and Conduct Committee for approval;

f) Pay application fee and annual subscription.

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Membership Categories

£2,500 – Application£2,500 – Annual




ICE Futures Full-Fledged membership fees (Brent, NatGas etc)

None

£5mn

None

£5mn

Min. Net Worth

€2,500 – Application€2,500 – Annual

Trade and/or clear own business and client business

CM

General Participant


Trade own business and client business

NCM


Trade own business only

NCM


Trade and/or clear own business only

CM

Trade Participant

ICE Futures Emissions membership fees

Trading rightsClearing status

Membership Category

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ICE Futures Europe Electronic Trading

ISVs• Aegis Software • Communicating Ltd• CQG• Easy Screen• ECCO• Ffastfill• GL Trade• ION Trading• Neotick• Nyfix• Object Trading• Patsystems • RTS• Rolfe & Nolan• Stellar Trading Systems• Trading Technologies• Trayport

WebICE

ICE Central Matching Engine

Trade registration system

LCH BACK TO APPENDICES

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Delivery Mechanism Details

CM submits client positionreports to ICE on a dailybasis.

i. Seller inputs transfer request to move allowances to CM.@ Expiry

i. CM submits delivery confirmation to LCH.Clearnet;

ii. LCH.Clearnet monitors receipt of allowances.

i. CM receives allowances from its client;

ii. Allowances transferred on to nominated LCH.Clearnet account.

T+1

If delivery problems occur,LCH.Clearnet will randomlyallocate Buyer and adviseaccordingly (not pro-rata).

Buyers CM paysfull contractvalue up front.

i. LCH.Clearnet receives allowances from CM;

ii. Allowances transferred on to randomly selected buyers CM a/c.

T+2

Transfer/delivery complete for those other than failed or late deliveries.

Sellers CMreceives full contract value.

i. CM receives allowances from LCH.Clearnet;

ii. Allowances transferred on to nominated Buyer’s a/c.

T+3

CommentsCash flowAllowance flow

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Documents

The Carbon Market How to Trade ECX Emissions Contracts March 2008