Australia’s leading provider of carbon market research, RepuTex Energy, has today become the first firm to meet compliance under the International Organization of Securities Commission’s Principles for Price Reporting Agencies (“IOSCO PRA Principles”) for an Australian Carbon Credit Units (ACCUs) price benchmark.
RepuTex launched its ACCU price assessments six years ago, in January 2018, capturing a broad base of traded information directly from buy-side and sell-side market participants, in addition to heard activity from intermediaries and electronic platforms.
RepuTex’s assessment has become the most widely adopted benchmark for the value of ACCUs sold under spot and forward contracts in Australia, with an estimated market value of over $800 million in 2023, a five-fold increase from 2022, behind increasing demand for the contracting of supply under the reformed Safeguard Mechanism.
The IOSCO PRA Principles – Enhancing the integrity and reliability of commodity price reporting
IOSCO is the international body of securities regulators and is the standard setter for the global securities sector. Its membership regulates 95% of the world’s securities markets in more than 130 jurisdictions, including Australia.
The IOSCO PRA Principles enhance the integrity and reliability of commodity price reporting by establishing best practice guidelines for governance, control, quality, integrity, and conflict management for entities that report prices.
The Principles were endorsed by the G20 in November 2012.
Under the framework, entities that report commodity prices – including carbon compliance prices – are encouraged to adopt the IOSCO PRA Principles to demonstrate their independence and impartiality, ensuring that reporting parties do not have a vested interest in a given market (e.g. do not receive compensation linked to the volume or value of transactions, or trade/own carbon offsets).
A lack of these safeguards can undermine the integrity of price benchmarks referenced in carbon contracts, making them susceptible to price distortion (including via the reported brokered market) through the withholding of information, delays to reporting, and/or transacting between related or affiliated parties.
In addition, in markets where liquidity can be low, such as the Australian carbon market, reported prices may be more easily manipulated via small trades, inflating or deflating the closing price, and creating a false impression of market sentiment.
RepuTex meets IOSCO compliance for ACCU price benchmark – BDO provides external audit of policies and activities
By establishing a best practice framework for benchmark prices, the IOSCO PRA Principles aim to ensure the quality and integrity of commodity price reporting, in turn, enhancing market confidence, and the reliability of contracts that reference such prices.
The framework lays out 26 individual principles – and 60 recommended practices – covering organisational governance, independence, control, quality, integrity, and conflict management in relation to published commodity price assessments.
This includes requirements for price reporting entities to not participate in a given market, to adopt clear and robust governance structures, including an oversight function, and adopt clear rules for the inclusion and exclusion of reported market data.
One of the requirements for compliance is an external audit of RepuTex’s pricing methodology, policies, process, and control activities. Independent assurance provider, BDO, reviewed the policies and procedures implemented by RepuTex to meet compliance with the requirements of the IOSCO PRA Principles.
A short summary of our policies and processes is provided below.
Our Survey Panel process
In developing markets such as the Australian carbon market, more representative, reliable pricing must be achieved by providing greater levels of transparency. This includes capturing a growing amount of market data from transactions that occur beyond the brokered market which, on average, represents just 30-40 per cent of traded volumes in the Australian over-the-counter (OTC) market.
To support the provision of information from market participants, we operate a “Survey Panel” process. The Survey Panel is made up of market data submitters who directly report information to members of the RepuTex price assessment team.
Only active participants with a verifiable track record as a buyer or seller are approved by RepuTex to directly submit input market data via the Survey Panel process. We accept market data by email, phone, messenger, and face-to-face meetings.
Our price assessment team collects input market data directly from sell-side and buy-side participants. This is considered in addition to market data and heard activity from intermediaries and electronic platforms (including confirmed trades, firm bids and offers, tender announcements and other activity reported to RepuTex), enabling our assessors to consider the widest universe of information in the OTC market.
Data hierarchy and application
In accordance with the IOSCO PRA Principles, we use the following hierarchy to measure the strength of market data submitted, and to determine fair market value.
Transaction information is the preferred source of market data. However, depending on the liquidity of the market – and the timing of activity – other information may be used, such as executable bids and offers. This can be in combination with transactions, or can substitute transactions, depending on liquidity.
For example, while in most markets there is a relatively higher rank given to confirmed transactions over bids and offers, in illiquid markets, value can be a function of time.
Depending on the time of day a transaction occurs, the most current competitive bids and offers may better represent market value. In this case, bids and offers may supersede transaction data when forming the assessment for the day.
Verification and exclusion of market data
Verification of market data is an important step to scrutinise reported information before it is used in the price assessment process. This serves to confirm any significant changes, identify any data submission errors, and/or inform assessors on necessary market or structural context.
Importantly, market data may also be excluded from the assessment process in the following cases:
- Information submitted after the close of the assessment process are not considered with that assessment window.
- Transactions that are for fixed or indexed prices are not considered.
- Transactions that have special circumstances or structures that, in the assessor’s judgment, render it unrepresentative of the market, are not considered.
- Transactions that are one-offs, or unrepeatable, or transactions that may distort the true market level, are not considered.
- Transactions that are duplicates. For example, where both a buyer and seller report a transaction, only one side of the trade will be considered.
- Transactions between related or affiliated parties are not considered.
Consideration of volume is crucial to the representativeness, and integrity of reported prices
In markets with low liquidity, consideration of the volume of transactions is an important input into the assessment of market value. This ensures that larger trades, which have a more significant market impact, are given more weight.
Additionally, the consideration of volume helps to mitigate price manipulation. As noted, in markets where trading volumes are low, prices may be more easily manipulated, for example via smaller trades prior to close (often occurring near the end of financial reporting periods), which inflate or deflate the closing price, and create a false impression of market sentiment.
Volume is therefore taken into consideration in our assessment process.
Accurate and reliable price assessments support wider use cases
Independent, accurate price reporting, supported by robust governance processes, is critical to strengthen the reliability of price information for adoption by front and back-office functions, be it in the pre-trade or post-trade environment.
How is RepuTex price information used in the market?
Long-term contracting: Established in 2018, our ACCU price assessment has become the most widely adopted benchmark for the value of ACCUs sold under physical delivery and derivative contracts in Australia, with an estimated market value of over $800 million in 2023, providing a reference point for supply contracts.
Mark to market: Use RepuTex prices to determine the market value of hedges & exposures, and track performance along with profit & loss computations.
Internal transfer pricing: Use RepuTex prices to determine the fair value of transactions and transfers between companies and subsidiaries.
Regulatory purposes: Use RepuTex prices to assist in value discovery at a regulatory level, such as default prices and make-good costs.
Market analysis: Using RepuTex information to support price discovery and understand market drivers/make investment decisions.
– – – – – – – – – – – – – – – – – – – – – – – –
If you have any questions or comments on our price information please contact our price assessment team via reporting@reputex.com. If you have any questions regarding data licensing please contact our Client Services team.
Kind Regards,
The RepuTex Team
Australian Energy Markets
