Climate-related Regulation of U.S. Derivatives Markets: the CFTC Asks You to Weigh In
The CFTC recently issued a Request for Information, asking the public how the CFTC should consider climate risk in its regulation of derivatives. Thus the agency appears ready to join the SEC in making sustainable finance an important part of its rulemaking plans.
New CFTC rules for climate risk would affect financial market participants worldwide such as investment managers, many of whom conduct their U.S. trading strategies for commodity derivatives under certain CFTC-mandated restrictions such as position limits. Considering the CFTC’s historically significant role in the regulation of U.S. derivatives markets, its RFI should be viewed by the investment community as a signal of what climate-related rules the CFTC may propose, and as an important opportunity to help shape those rules by submitting responsive comments. Those comments must arrive at the CFTC no later than 8 August 2022.
With its RFI feedback, the CFTC seeks to eventually produce “new or amended guidance, interpretations, policy statements, or regulations, or other potential Commission action” on climate-related risks in derivative markets. Such oversight potentially would apply to any entities that the CFTC currently regulates, including:
- Designated Contract Markets (DCMs)
- Swap Execution Facilities (SEFs)
- Swap Data Repositories (SDRs)
- Derivatives Clearing Organizations (DCOs)
- Futures Commission Merchants (FCMs)
- Introducing Brokers (IBs)
- Swap Dealers (SDs)
- Major Swap Participants (MSPs)
- Commodity Pool Operators (CPOs)
- Commodity Trading Advisors (CTAs)
The RFI, published on 2 June 2022, consists of 34 sets of questions posed to the industry. Some are informational, seeking to understand certain marketplace practices. Many more solicit policy opinions on discrete matters, for example, “Are there ways in which updated disclosure requirements could aid market participants in better assessing climate-related risks?” These are the areas the CFTC touches on:
- types of data that would help the CFTC evaluate climate-related risks of derivatives market participants
- climate scenarios, stress testing and other data tools that would help measure risks to derivatives market participants
- adaptation of risk management frameworks to climate-related financial risks
- updating of disclosure requirements to better reflect climate-related financial risk
- regulation of climate-related derivative products
- regulation of voluntary carbon markets
- climate-related financial risks of digital assets
- impact of climate-related financial risk to vulnerable communities
- public-private partnerships to address climate-related financial risk in derivatives markets
- improvement of CFTC’s capacity to address climate-related financial risks, and CFTC coordination efforts with international regulators and groups
While all five CFTC Commissioners approved the RFI, two of them – Summer Mersinger and Caroline Pham – cautioned the CFTC against overstepping its jurisdictional boundaries, were it to pursue some of the regulatory efforts contemplated in its RFI. It’s likely that any future opposition to such CFTC rules would, at least in part, be based on this issue of federal agency jurisdiction (similar to what we have seen in opposition to the SEC’s climate disclosure rules for issuers).
Anyone wishing to respond to the RFI should do so by one (and no more than one) of the following methods:
- via the CFTC Comments Portal, at https://comments.cftc.gov (select the “Submit Comments” link for the release, and follow the instructions on the Public Comment Form)
- this is the method that the CFTC encourages
- by postal mail, to:
Christopher Kirkpatrick, Secretary of the Commission
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street NW
Washington, DC 20581
- by hand delivery / courier: same as for postal mail (above)
Comments submitted will be public, and posted as received at https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx.
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