On June 2, 2022, the US Commodity Futures Trading Commission
(“CFTC”) released a request for information on how
climate-related financial risk is related to the derivatives
markets and underlying commodities markets (the “RFI”).1 The RFI is intended to inform the
CFTC’s next steps in this rapidly developing area and respond
to the 2021 Report on Climate-Related Financial Risk from the
Financial Stability Oversight Council (“FSOC”).2
However, CFTC Commissioners already have raised concerns
regarding the scope of the RFI and the CFTC’s authority to take
certain actions under it. Therefore, market participants should
consider submitting comments that address not only the questions
raised in the RFI but also the statutory limits on the agency’s
authority.
Responses to the RFI are due 60 days following publication in
the Federal Register, which is expected shortly. In this
Legal Update, we summarize key parts of the RFI and highlight some
of the concerns raised by CFTC Commissioners.
Background
In March 2021, President Biden issued an executive order that
directed FSOC to make recommendations to its member agencies on how
climate-related financial risk can be mitigated, including through
regulatory standards.3 In October
2021, FSOC issued a report that contained 35 high-level
recommendations on how its member agencies could begin to mitigate
climate-related financial risk. The CFTC is a member of FSOC.
2022 RFI
The CFTC intends for the RFI to better inform its understanding
and oversight of climate-related financial risk as it relates to
the derivatives and commodities markets. It will use the responses
from the public to inform its next steps on mitigating
climate-related financial risk and respond to the FSOC report.
Consistent with how other agencies view climate-related
financial risk, the RFI identifies two categories of risk: physical
risks and transition risks. It states that physical risks generally
are characterized by harm caused by acute, climate-related events
such as hurricanes, wildfires, floods, and heatwaves and chronic
shifts in precipitation patterns, sea level rise, and ocean
acidification. In contrast, transition risks generally are
characterized by stresses to certain financial institutions or
sectors that result from shifts in policy, regulations, customer
and business preferences, technology, credit or insurance
availability, or other market or social forces that can affect
business operations.
The CFTC believes that climate-related financial risk may
directly or indirectly impact CFTC registrants, other market
participants, and the derivatives and commodities markets as a
whole. Therefore, it is requesting comment on all applicable
aspects of its regulatory framework and market oversight, as they
may be affected by climate-related financial risk.
The RFI contains 34 multi-part questions addressing the
following topics:
- Data
- Scenario Analysis and Stress Testing
- Risk Management
- Disclosure
- Product Innovation
- Voluntary Carbon Markets
- Digital Assets
- Financially Vulnerable Communities
- Public-Private Partnerships/Engagement
- Capacity and Coordination
The questions are broadly worded, not being limited to
particular derivatives or underlying reference assets. Notable
points include:
- Question 12 asks if the CFTC should consider amending its
minimum capital and liquidity requirements to better recognize
climate-related risks. However, Secretary of the Treasury Janet
Yellen already has indicated that it is too early to consider
adjusting capital requirements for US banks based on climate
change-related risks.4 Therefore, it
would seem premature to consider such steps for the derivatives
markets. - Question 17 asks if the CFTC should require registered entities
to disclose greenhouse gas emissions. Historically, disclosures by
CFTC-registered entities have been limited to financial
requirements and conduct issues. It is unclear how greenhouse gas
emissions could be relevant to either category, and in any event,
such a requirement may lead to duplicative reporting for
CFTC-registered entities that are subsidiaries of public
companies.5 - Questions 22 through 24 ask about voluntary carbon markets,
which trade carbon offsets. The questions indicate that the CFTC is
considering creating some form of registration framework for market
participants within the voluntary carbon markets. This is
surprising because, to the extent that carbon offsets are
derivatives, market participants already are subject to the
CFTC’s registration requirements. Similarly, if carbon offsets
merely underlie certain derivatives, then the CFTC’s authority
would be limited to antifraud and anti-manipulation actions, not
registration. - Questions 26 and 27 ask about financially vulnerable
populations as they relate to climate-related financial risks.
Historically the CFTC has not considered such populations in
relation to the derivatives markets, which generally are limited to
large financial institutions, large traders, and end users (e.g.,
oil producers). - Questions 31 and 32 ask if the CFTC should convene a private
standard-setting committee. This committee would be modeled on the
Alternative Reference Rate Committee formed to facilitate the IBOR
transition. It would be intended to further the development of
climate-related indices designed for mitigation of the long-term
risks of climate change. However, the CFTC (and all US regulators)
generally lack the authority to regulate indices.6
The overall thrust of the RFI is that CFTC-registered entities
may need to adapt their risk management frameworks for
climate-related financial risk and market participants may need to
similarly adapt their dealing, trading, and advisory businesses in
the derivatives markets. Further, the agency may need to adapt its
oversight of the derivatives markets, including any new or amended
derivative products created to hedge climate-related financial
risk. Given the expansive nature of some of the actions
contemplated in the RFI, these changes may push up against the
CFTC’s statutory authority, as discussed below.
Scope and Authority Concerns
All Commissioners agreed to the RFI’s release, but some
released statements raising concerns with aspects of it, and it is
unclear if those Commissioners will support the regulatory action
contemplated by certain questions. In particular, Commissioner
Summer Mersinger’s statement raised concerns with the scope of
the RFI and the CFTC’s authority to take certain actions that
it contemplates.7
She noted that none of the questions mention legacy agriculture
contracts and futures markets, which is concerning given the
agriculture sector’s exposure to climate change and use of
futures to hedge risks. She also highlighted seven questions that
she believes extend beyond the CFTC’s jurisdictional boundaries
under the Commodity Exchange Act (“CEA”). For example,
she notes that question 25 asks whether “digital assets and/or
distributed ledger technology offer climate-related financial risk
mitigating benefits,” even though the CFTC “does not have
statutory authority under the CEA to regulate digital assets or
distributed ledger technology except to the extent they involve
derivatives.”
Footnotes
1 Press Release, CFTC Releases Request for
Information on Climate-Related Financial Risk (June 2, 2022),
https://www.cftc.gov/PressRoom/PressReleases/8541-22?utm_source=govdelivery.
2 Please see our Legal Update on the 2021
report: https://www.mayerbrown.com/en/perspectives-events/publications/2021/10/us-fsoc-reportclimaterelated-financial-risk-an-emerging-threat.
3 Please see our Legal Update on the 2021
executive order: https://www.mayerbrown.com/en/perspectives-events/publications/2021/05/president-biden-signs-executive-order-on-addressing-climate-change-risk-through-financial-regulation.
4 See Christopher Condon, Janet Yellen Says
Higher Bank Capital Rules for Climate Risk Are
“Premature,” Bloomberg (Feb. 2, 2022), https://www.bloomberg.com/news/articles/2022-02-02/yellen-says-higher-bank-capital-rules-for-climate-premature.
5 Please see our Legal Update on a proposal
from the Securities and Exchange Commission that would require
disclosure of greenhouse gas emissions by public companies: https://www.mayerbrown.com/en/perspectives-events/publications/2022/03/sec-proposes-climate-change-disclosure-rules-applicable-to-public-companies.
6 See our prior discussion of the regulation (or
lack thereof) of indices: https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2019/02/white-paper-converted.pdf.
7
Press Release, Concurring Statement of Commissioner Summer K.
Mersinger Regarding Request for Information on Climate-Related
Financial Risk (June 2, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement060222.
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