As is typical with any new market, straight-through processing rates are very low in the carbon trading markets. The rapidly growing markets - which grew 68% to €94 billion in 2009 according to Point Carbon, a consulting service for power, gas and carbon markets - are characterised by manual processing and its associated risk.

Jorund Buen, a senior adviser at Point Carbon, told delegates at Swift's Sibos conference in Hong Kong last September that the global emissions market would be worth $2-3 trillion by 2020 - larger than the hedge fund market is now. He said: "Carbon trading should be seen as an opportunity comparable to exchange traded funds or worker remittances in terms of its impact on financial markets activity."

Anthony Collins, general manager, emerging markets at the Australian Stock Exchange told the same audience that Swift "can and should play an important role in underpinning the financial aspects of these markets. In developing mechanisms to serve carbon trading in our markets, we recognised that participants will need safe settlement, custody, valuation, price discovery and the ability to transfer risk."

One of the problems highlighted during the Sibos discussion on carbon trading was that entitlements to carbon credits are typically maintained by national registries, of which there are 27 in Europe. The registries are connected via the internet but, not surprisingly, the panellists felt Swift would be better placed to provide a more reliable and standardised solution. Indeed, Graham Cox, director, carbon services, global transaction banking at Deutsche Bank, told delegates that Swift was in discussion with the 27 European registries in Europe to develop a solution.

However, since this time, says a Swift spokesman, the market has slowed partially because of the financial downturn and also because of a lack of progress at December's climate conference in Copenhagen, at which delegates failed to reach agreement on limiting greenhouse emissions. The spokesman says: "From Swift's perspective, we have a solution: category five messages are available for use as and when the markets are ready."

Carbon can be settled post-trade like any other asset, he says, so category five messages, which are extensively used in the securities markets, can be reused for carbon. "Several banks have confirmed they intend to use category five over Swift for this purpose but none have yet done so - they are waiting for the carbon market to build up, and so is Swift."

Not everyone is sitting back, however. Seb Walhain, managing director energy, carbon and commodities at Fortis Bank Nederland Merchant Banking says that when the European Commission set up its Emission Trading System in 2005, it became obvious that accounting for carbon would have a big impact on investment and lending portfolios. For that reason, the bank set up a Carbon Banking division that undertakes carbon trading, escrow and settlement services.

There are significant differences between carbon instruments and other utilities, says Walhain. "For example with CERs [certified emission reductions - a carbon credit], marking to market post-2012 is difficult and although they are financial instruments, each country has a national carbon registry and carbon instruments can be traded back and forth between registries without any ties to a financial system."

There is uncertainty in the market about whether CERs will still be eligible after 2012, when a revised EU ETS comes into effect, says Wahlain. "These will be assets on balance sheets that will have value post-2012, but industry participants cannot be sure of this".

In addition to Fortis Bank, a number of other large transaction banks are keen to establish a presence in the carbon markets, such as Deutsche Bank and Citi. These offer a range of administration and settlement services to companies engaged in the global carbon and environmental markets. Offerings include integrated escrow, trade settlement and custody along with auction services.

Marc-Robert Nicoud, vice-president, international markets at international central securities depository Clearstream, says that in Europe, which represents the majority of carbon trading activity, the European Union created an entirely new infrastructure for the carbon markets, rather than leveraging the existing infrastructure in the financial world.

"Our clients are used to certain levels of STP in the securities markets and they expect the same level of service for the carbon market. We act as the interface between our customers and the carbon registries, of which there are 26 in Europe. In the securities world, CSDs are well automated but the carbon registries have not built STP connectivity solutions for their account holders."

In December last year Clearstream launched Global Emissions Market Access, a settlement and custody service for carbon trading rights. The service is aimed at financial institutions interested in carbon trading rights but that are reluctant to take on the risk of manual settlement. Gema uses Clearstream's existing connectivity and applications by making carbon rights - European Union Allowances and CERs - eligible in Clearstream Banking (Luxembourg). Users will gain access to the markets without requiring any system developments or new back office processes. Identification codes for carbon rights will be allocated using industry recognised formats as for any other security eligible in Clearstream.

"Gema is aimed at financial institutions that don't want to set up a separate back office to manage their positions and trades in carbon rights," says Nicoud. "They can use the same Clearstream infrastructure for carbon rights, which will appear as an extra position on their existing accounts. We will do the same reporting on those assets as we do on securities."

Moreover, Gema also allows delivery versus payment settlement of trades in carbon allowances, something the carbon registries can't do because they don't handle cash, he says. "This is an important feature for our clients as they seek to minimise operational risk as well as counterparty risk."

Nicoud says there is ambiguity in Europe about the legal nature of carbon rights. "Some countries say they are not financial instruments, while others have left it open to interpretation. This ambiguity has held back the carbon markets to a certain extent as it prevents the application of well established financial legislation. By treating carbon rights as financial instruments, Clearstream brings secure financial processes to the carbon market."

The lack of a definition of carbon rights also means that Clearstream cannot offer the range of services it would like. For example, he says if carbon rights were defined as financial instruments, their use as collateral could be widened and optimised.

Wahlain agrees there are low STP levels in the carbon markets. "Only the very largest players in the market are working on systems for matching trades in the back office. What is needed is clarity on the post-2012 framework - will the ETS continue as a standalone scheme or will it be part of a global system? If China, the US and India were to implement similar schemes the world carbon trading market would increase tenfold. A market of that size would justify investment in the systems needed to automate carbon trading".