FSA warns of uncertainty over emissions

The UK’s Financial Services Authority (FSA) has warned of a lack of clarity regarding the regulation of emissions markets.

In a report examining the risks and challenges in the global emissions markets published at the end of March, the regulator said it has received reports that certain firms have cited their FSA authorisation as a mark of endorsement for activities in the emissions market - which does not fall within its regulatory remit.

For example, firms were reported to have claimed to overseas emissions market authorities, which might not be aware of the scope of the UK regulator’s activity, that FSA authorisation confers competence in setting up clean development mechanism projects - where developed countries invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries.

“This is misleading and could result in potential enforcement action… this type of behaviour undermines confidence in the market for those authorities and for participants alike,” the report said.

Another issue raised in the paper was concerns among some market participants about the fixed supply of emission allowances available for delivery by derivatives contracts. If the number of contracts continues to grow at a rapid pace, there could be a situation where there are not enough underlying assets that can be delivered. This situation has occurred for other commodities and has been overcome by cash settlement rather than exchanging underlyings.

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