CFTC Commissioner Dan M. Berkovitz and Acting Chair Rostin Behnam described the CFTC's role in facilitating the transition to a low-carbon economy. At an Energy and Environmental Markets Advisory Committee ("EEMAC") meeting, the Commissioners focused on cap-and-trade programs, the current state of exchange-listed carbon derivative products and the use of the derivatives markets as risk management and price discovery tools.
Mr. Berkovitz said the CFTC can support the transition to a carbon-neutral economy by:
- securing the integrity of the carbon markets (he urged a better understanding of how the primary, secondary and derivatives carbon markets interact, and how companies comply with their obligations, manage risks and discover prices);
- promoting "responsible innovation" by exchanges and market participants in climate-related products and services; and
- ensuring appropriate management and disclosure of climate-related risks by CFTC registrants, including an examination of currently reported climate-related risks and whether additional disclosures are appropriate.
Mr. Berkovitz reiterated the recommendations made by the Climate-Related Market Risk Subcommittee of the CFTC Market Risk Advisory Committee in its "Managing Climate Risk in the U.S. Financial System" report, including: (i) research on the impact of climate-related risks on central counterparties, futures commission merchants ("FCMs"), traders and funds; (ii) coordination with other regulators; and (iii) expansion of risk management rules and related quarterly risk exposure reports to cover material climate-related risks.
Mr. Behnam also underscored the Climate-Related Market Risk Subcommittee's September report, pointing to his testimony before the House Select Committee on the Climate Crisis and the establishment of the Climate Risk Unit ("CRU"). Mr. Behnam stated that the future of the CRU will involve "raising risk management awareness and visibility within our markets and the broader economy so that we can identify where the holes are; where we need to be most vigilant in both our support and leadership as regulators."
Commentary Steven Lofchie
While it is clear that the CFTC Commissioners are enthusiastic about playing a role in climate change, that role should be limited. In the case of carbon markets that are regulated by the CFTC, the CFTC has an obligation to understand how price discovery in those markets works so that it can regulate trading and be on the lookout for improper trading activities. It is not apparent why the CFTC would deem it necessary to mandate "climate risk disclosure" by CFTC registrants. The CFTC should not be seeking to expand its authority to the far periphery of the relevant statute or beyond, given the limitations of its resources.
Since Dodd-Frank was adopted, the number of FCMs has gone down. As a consequence, the futures business has become increasingly concentrated. The CFTC should be mindful that regulatory enthusiasm for climate-related rulemakings does not impose material expenses that further shrink the number of industry participants.
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