Ruling kills Romanian OTC carbon permit trading

By Luiza Ilie and Michael Szabo

BUCHREST/LONDON, Feb 24 (Reuters) - Romania's securities regulator have defined European Union carbon permits as financial instruments, a move which will force all its emissions trading onto one of the country's exchanges.

Emissions traders in eastern Europe said the unilateral ruling on Tuesday is possibly illegal and effectively kills off Romania's over-the-carbon (OTC) permit trading market under the EU's $100 billion emissions trading scheme.

Under the scheme, polluting companies receive greenhouse gas emission permits, called EU Allowances (EUAs), which can be freely traded with other firms, including utilities and banks, in other EU member states.

As the European market is still very fragmented with up to 10 different exchanges trading EUAs, the OTC market, composed of traders and brokers scattered across the EU's 27 member states, makes up a significant portion of trade.

The ruling prevents foreign firms from trading Romanian EUAs without joining the Sibiu Monetary-Financial and Commodities Exchange (SIBEX), currently the only Romanian exchange licensed to trade EUAs, the exchange's deputy director told Reuters.

"Foreign traders can no longer intermediate in Romania with such certificates unless they become members of the markets that can trade, meaning SIBEX at the moment," said Darius Cipariu.

"As securities, they are brought on a transparent, organised market where quotations are visible for all participants ... there are no more OTC transactions," he added.

SIBEX currently boasts just 38 authorised members.

"The Commission was aware that this step might be taken, but the Commission was not consulted on any details," a European Commission press officer said.

"As we are not aware of the details, it is too early yet to comment on the lawfulness or scope of the measure."


LEGAL PROVISIONS

Romania's National Securities Commission have classified carbon credits as securities and said legal provisions under the country's capital markets now apply to any firm trading EUAs.

The commission limits trading in capital market to "financial investment firms authorised by the National Securities Commission, lending institutions authorised by the Romanian Central Bank ... as well as similar entities authorised in EU and non-EU member states."

Romania will issue its 2010 quota of over 70 million EUAs to industry on Friday, a trader said, but the ruling prohibits any unregulated Romanian firm not allocated EUAs under the EU scheme from trading them.

"It's disgraceful that this was not discussed with industry," said James Atkins, chairman of Budapest-based Vertis Environmental Finance. "We've submitted a complaint to the Romanian courts as this appears to break a number of laws."

EUA futures, the staple of the EU market, are already considered financial instruments throughout Europe while EUAs traded on the spot market are normally considered ordinary goods that command value-added tax (VAT) when traded.


SIBEX's Cipariu said the ruling reduces the threat of VAT fraud, a scam that Europol said cost the EU 5 billion euros in lost tax revenues last year. [ID:nGEE5B908C]

"(EUAs) are now exempt from VAT. This facilitates transactions between Romanian operators and transactions with foreign partners," he said. (Additional reporting by Nina Chestney in London; editing by James Jukwey)