The company will use the data to take additional steps to deal with local weather dangers within the commodity derivatives markets.
By Jean-Philippe Brisson, Yvette Valdez, Douglas Yatter, Joshua Bledsoe, Michael Dreibelbis, Qingyi Pan, and Deric Behar
On June 2, 2022, the Commodity Futures Buying and selling Fee (CFTC) issued a Request for Data (RFI) to tell its understanding and oversight of climate-related monetary danger related to the derivatives markets and underlying commodities market. The CFTC is in search of public suggestions on all points of climate-related monetary danger that “might pertain to the derivatives markets, underlying commodities markets, registered entities, registrants, and different associated market contributors.”
Based on the RFI, public response could also be used to tell new or amended steering, interpretations, coverage statements, laws, or different potential CFTC motion. The knowledge may also inform CFTC’s response to the suggestions of the Monetary Stability Oversight Council 2021 Report on Local weather Associated Monetary Threat (see Latham’s weblog publish on the FSOC Report) and inform the work of the CFTC’s Local weather Threat Unit (CRU) (see Latham’s weblog publish on the CRU). Feedback on the RFI have been initially due by August 8, 2022. On July 18, 2022, the CFTC prolonged the deadline by an extra 60 days; feedback are subsequently due by October 7, 2022.
The Request for Data
The RFI seeks feedback on bodily and transition danger, and poses particular questions on how climate-related monetary dangers might have an effect on the derivatives markets and market contributors.
The RFI echoes lots of the basic considerations within the latest RFIs issued by the Workplace of the Comptroller of the Forex (right here) and the Federal Deposit Insurance coverage Company (right here), with a deal with tailoring; present steering; present danger administration practices; knowledge, disclosures, and reporting; and state of affairs evaluation. The CFTC’s RFI goes additional, nevertheless, masking local weather danger because it pertains to product innovation, voluntary carbon markets, digital belongings, public-private partnerships and engagement, and capability and coordination.
A few of the key questions are:
- Threat Administration: How would possibly entities must adapt their danger administration framework to deal with climate-related monetary danger? Ought to the CFTC replace its regulation or steering to higher deal with climate-related danger, together with credit score dangers, market dangers, counterparty dangers, and different monetary and operational dangers?
- Knowledge: What forms of knowledge would assist the CFTC consider the climate-related monetary danger exposures of registered entities, registrants, and different contributors within the by-product markets? What steps ought to the CFTC contemplate so as to have higher entry to constant and dependable knowledge to evaluate climate-related monetary dangers?
- Disclosure: What particular extra disclosure necessities would help market contributors in higher assessing climate-related danger? What steps ought to the CFTC contemplate to higher inform the general public of its efforts to evaluate and deal with climate-related monetary dangers?
- State of affairs Evaluation and Stress Testing: What kind of local weather forecasts, eventualities, or different knowledge instruments can be helpful to the CFTC? Is there a long-term stress testing state of affairs that’s related to the CFTC?
- Product Innovation: What merchandise are presently used, or are being created, to handle climate-related monetary danger, and are there protections or guardrails that the CFTC may contemplate to advertise market integrity amongst these merchandise?
- Voluntary Carbon Markets: Are there methods during which the CFTC can improve the integrity of the voluntary carbon markets to foster transparency, equity, and liquidity in these markets?
- Digital Belongings: Are digital belongings creating climate-related monetary danger for CFTC registrants and may the CFTC deal with this danger with regulation? Do digital belongings and/or distributed ledger expertise supply climate-related monetary danger mitigating advantages?
- Public-Non-public Partnerships/Engagement: What mechanisms ought to the CFTC use to foster public-private partnerships to deal with climate-related monetary danger and are there any consultants with whom the CFTC ought to collaborate to deal with this subject? Ought to the CFTC contemplate a standard-setting committee for climate-related indices designed to mitigate the long-term dangers of local weather change?
- Capability and Coordination: What steps ought to the CFTC take to increase its capability to watch climate-related monetary dangers, and the way ought to the CFTC coordinate its efforts with worldwide teams and different regulatory our bodies?
The Commissioners Weigh In
Chairman Rostin Behnam and Commissioners Kristin N. Johnson and Christy Goldsmith Romero voted affirmatively on the RFI. Commissioners Summer time Ok. Mersinger and Caroline D. Pham concurred.
- Commissioner Mersinger revealed a assertion concurring with the RFI, expressing help for the efforts of the CFTC to interact with market contributors, business, and most people. She is worried, nevertheless, that the RFI exceeds the scope of the CFTC’s statutory jurisdiction beneath the Commodity Alternate Act (CEA) by requesting info not solely on the derivatives markets, however on the underlying commodity markets as properly. She additionally famous the dearth of questions pertaining to agriculture contracts and futures markets generally used to hedge local weather publicity.
- Commissioner Pham revealed a assertion concurring with the RFI but in addition expressed concern that the CFTC shouldn’t exceed the scope of its mandate, given the CFTC’s core features and restricted assets. She additionally acknowledged that the CFTC “ought to search to harmonize from the beginning with present prudential and different regulatory regimes so as to be environment friendly and keep away from imposing duplicative or unnecessarily burdensome and complicated necessities.”
- Commissioner Johnson revealed a assertion in help of the RFI, stating that the RFI is “an necessary step towards studying from market contributors how these markets might assist them to hedge and effectively handle present and evolving climate-related danger.” She additionally acknowledged that “these inquiries are properly throughout the ambit of the CFTC’s statutory authority.”
- Commissioner Goldsmith Romero revealed a assertion in help of the RFI, stating that the “CFTC needs to be on the forefront of monetary regulatory efforts to grasp, and establish actions to mitigate, climate-related monetary dangers and that influence CFTC-regulated markets.” She additionally asserted that it’s throughout the CFTC’s ambit to advertise accountable innovation and transparency within the markets for derivatives merchandise and carbon offsets used to hedge in opposition to local weather danger.
CFTC and the Carbon Offset Markets
In his remarks on the Might 18 Politico Sustainability Summit, Chairman Behnam famous that the CFTC had recognized the potential for fraud within the carbon offset market. He mentioned that whereas many market contributors have been providing reliable contracts, some have been “most likely… not fairly performing in good religion.” Whereas carbon offsets are usually not essentially a standard commodity, Chairman Behnam superior the CFTC’s place that offsets are legally a commodity throughout the scope of the CFTC’s authority. Though the CFTC lacks authority to manage money commodity markets, spot costs instantly influence futures and derivatives pricing, which permits the CFTC to carry enforcement actions for fraud and manipulation that originate in money markets. The CFTC has subsequently recognized a necessity for “official sector participation” to make sure that offsets are credible and verifiable sufficient to help correct net-emission disclosures.
The Voluntary Carbon Markets Convening
The RFI launch coincided with the CFTC’s second Voluntary Carbon Markets Convening on June 2, 2022. In his opening remarks, Chairman Behnam expressed his hope that the Convening would offer a public discussion board for voluntary carbon market contributors “to look at points associated to the availability and demand for top of the range carbon offsets with a deal with integrity, infrastructure and credibility.” His key concern: “what function ought to the CFTC play in these markets?”
A number of themes emerged from the panel of market contributors who offered suggestions for the CFTC: transparency, integrity, liquidity, and world harmonization. Non-public market contributors imagine that transparency in voluntary carbon credit score (VCC) initiatives and credit score supply will enhance public belief out there. Many contributors imagine higher market integrity will scale back the chance of fraud and unethical conduct, and promote important market liquidity. Lastly, contributors imagine the voluntary carbon market is essentially world and requires a globally coordinated regulatory framework to develop and keep away from fragmentation. Based on one speaker, the CFTC ought to take inventory over its present regulatory authority and search for alternatives to carry transparency and consistency to VCC markets.
Latham & Watkins will proceed to watch the RFI and different points associated to the CFTC’s local weather danger mitigation efforts.
This publish was ready with the help of summer season affiliate Lindsay Martin.
