The CFTC’s Climate Change Initiative Takes Tentative Step Forward

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.”

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.