Deemed value arbitrage in the New Zealand annual catch entitlement market

New Zealand's Quota Management System (QMS) consists of a two tier operational structure: Quota shares in a fishstock provide an Annual Catch Entitlement (ACE) of the total allowable commercial catch (TACC) of the specific fishstock. Fishers operating in a multispecies fishery need a portfolio of ACE that matches the mix of their annual catch. Fishers may own quota shares, and thereby receive the needed ACE allocations or they may operate without quota shares and rely on acquiring ACE in the ACE market. Whatever the fisher's situation, it is common for fishers to both buy and sell ACE during a fishing year as they seek to balance their actual catch against ACE. The incentive to achieve a balance is strong because at year-end fishers whose catch exceeds ACE are required to pay a fee called 'deemed value'. For many fishstocks the deemed value fee increases sharply as the percentage by which a fisher's catch exceeds their ACE increases. When no 'unbalanced' ACE is available for purchase, an overfished fisher may attempt to mitigate their deemed value liability by engaging in arbitrage trading in ACE whereby they buy ACE from other overfished fishers. This study examines the nature and extent of ACE arbitrage behaviour in the New Zealand quota managed fishery. The study finds that the number of fishstocks where arbitrage trading occurs is relatively small and is declining. However, sizeable deemed value mitigation transactions are still evident.