2022-12302
[Federal Register Volume 87, Number 110 (Wednesday, June 8, 2022)]
[Notices]
[Pages 34856-34862]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-12302]
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COMMODITY FUTURES TRADING COMMISSION
Request for Information on Climate-Related Financial Risk
AGENCY: Commodity Futures Trading Commission.
ACTION: Request for information.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is seeking public responses to this Request for
Information to better inform its understanding and oversight of
climate-related financial risk as pertinent to the derivatives markets
and underlying commodities markets. Public responses to this request
will help to inform the Commission's next steps in furtherance of its
purpose to, among other things, promote responsible innovation, ensure
the financial integrity of all transactions subject to the Commodity
Exchange Act, and avoid systemic risk. The information received will
also inform the Commission's response to the recommendations of the
Financial Stability Oversight Council 2021 Report on Climate-Related
Financial Risk and inform the ongoing work of the Commission's Climate
Risk Unit. The Commission may use this information to inform potential
future actions including, but not limited to, issuing new or amended
guidance, interpretations, policy statements, regulations, or other
potential Commission action within its authority under the Commodity
Exchange Act as well as its participation in any domestic or
international fora.
DATES: Comments must be received on or before August 8, 2022.
ADDRESSES: You may submit comments, identified by the name of the
release, ``Climate-Related Financial Risk RFI'', by any of the
following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this release and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above. Please submit your comments using only one of these
methods. Submissions through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (``FOIA''), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec. 145.9 of the Commission's
regulations.\1\
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\1\ 17 CFR 145.9.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission
[[Page 34857]]
from https://comments.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain responses to the Request for
Information will be retained in the public comment file and may be
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accessible under the FOIA.
FOR FURTHER INFORMATION CONTACT: Abigail S. Knauff, (202) 418-5123,
[email protected], Deputy, Climate Risk Unit; Brigitte C. Weyls, (312)
596-0547, [email protected], Assistant Chief Counsel, Division of Market
Oversight; Andrew Ruggiero, (202) 379-8919, [email protected],
Attorney Advisor, Market Participants Division; Richard Haynes, (202)
418-5063, [email protected], Deputy Director, Division of Clearing and
Risk; Diana Dietrich, (202) 418-6767, [email protected], Senior
Assistant General Counsel; or Mark Fajfar, (202) 418-6636,
[email protected], Senior Assistant General Counsel, Legal Division,
Commodity Futures Trading Commission, Three Lafayette Centre, 1151 21st
Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. Climate-Related Financial Risks
The effects of climate change and the transition to a low-carbon
economy present emerging climate-related financial risks, which fall
into two broad categories: Physical risks and transition risks.\2\
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.\3\ These extreme weather events and
natural disasters, especially as they increase in frequency and/or
intensity, can damage assets, disrupt operations, and increase
costs.\4\ 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.\5\
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\2\ E.g., Financial Stability Oversight Council (``FSOC''),
``Report on Climate-Related Financial Risk 2021'' (Oct. 21, 2021),
available at https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf (``FSOC Report''), at 12.
\3\ See Financial Stability Board (``FSB''), ``The Implications
of Climate Change for Financial Stability (Nov. 2020),'' available
at https://www.fsb.org/2020/11/the-implications-of-climate-change-for-financial-stability/, at 6 (``Increased physical risks could
result in both market and credit risks to the financial system.
Market risks--that is, the risk of reductions in the value of
financial assets--could result in losses for banks, asset owners,
and other financial institutions. Market risks might also emerge due
to abrupt increases in risk premia due to uncertainty concerning
financial assets' future payoffs. Physical risks can also give rise
to credit losses due to reductions in the income--or reductions in
the profitability--of borrowers.'').
\4\ See FSOC Report at 101-02 (discussing climate change
physical-risk implications for financial sector operations;
regarding the potential impact of rising sea levels and increased
flood risk in the northeastern United States, notes ``the
concentration of sector critical infrastructure in the New York City
metro area, . . . home to five of the current seven U.S.-based
global systemically important banks and five of the current eight
FSOC-designated financial market utilities'').
\5\ Id. at 12-13. For example, economic measures that raise
implicit carbon prices to reduce greenhouse gas (``GHG'') emissions
could raise transition risk for suppliers and users of GHG-intensive
production processes, products, or services. The FSOC Report notes
that ``the financial sector may experience credit and market risks
associated with loss of income, defaults and changes in the values
of assets, liquidity risks associated with changing demand for
liquidity, operational risks associated with disruptions to
infrastructure or other channels, or legal risks.'' Id. at 13-14.
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Climate-related financial risk may directly or indirectly impact
Commission registered entities,\6\ registrants,\7\ and other market
participants as well as the derivatives markets and the underlying
commodities markets themselves. Effects may include, but are not
limited to, heightened market volatility, disruptions of historical
price correlations, and challenges to existing risk management
assumptions. The Commission is seeking comment on all applicable
aspects of its existing regulatory framework and market oversight, as
they may be affected by climate-related financial risk.
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\6\ As relevant here, a ``Registered Entity'' as defined in the
Commodity Exchange Act (``CEA'') includes designated contract market
(``DCM''); derivatives clearing organization (``DCO''); swap
execution facility (``SEF''); and swap data repository (``SDR'').
CEA sec. 1a(40), 7 U.S.C. 1a(40).
\7\ ``Registrant'' means a commodity pool operator (``CPO'');
commodity trading advisor (``CTA''); futures commission merchant
(``FCM''); introducing broker (``IB''); leverage transaction
merchant; floor broker; floor trader; major swap participant
(``MSP''); retail foreign exchange dealer; or swap dealer (``SD'')
that is subject to the Commission's regulations; or an associated
person of any of the foregoing other than an associated person of a
SD or MSP. 17 CFR 1.3 (2021).
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B. Executive Order 14030
On May, 20, 2021, President Biden signed Executive Order 14030 on
Climate-Related Financial Risk (``Executive Order 14030''), which
outlines a whole-of-government strategy to mitigating climate-related
financial risk. Executive Order 14030 recognizes that the failure of
financial institutions to appropriately and adequately account for and
measure physical and transition risks threatens the competitiveness of
U.S. companies and markets.\8\ Executive Order 14030 articulates a
policy to advance the disclosure of climate-related financial risk and
act to mitigate that risk and its drivers while achieving a net-zero
emissions economy by 2050.\9\
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\8\ FSOC Report at section 1.
\9\ E.O. 14030, 87 FR 27967 (May 20, 2021) (Climate-Related
Financial Risk), at https://www.federalregister.gov/documents/2021/05/25/2021-11168/climate-related-financial-risk; see also E.O.
14008, 86 FR 7619 (January 27, 2021) (Tackling the Climate Crisis at
Home and Abroad), at https://www.federalregister.gov/documents/2021/02/01/2021-02177/tackling-the-climate-crisis-at-home-and-abroad;
E.O. 13990, 86 FR 7037 (January 20, 2021) (Protecting Public Health
and the Environment and Restoring Science to Tackle the Climate
Crisis), at https://www.federalregister.gov/documents/2021/01/25/2021-01765/protecting-public-health-and-the-environment-and-restoring-science-to-tackle-the-climate-crisis.
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Section 3 of Executive Order 14030 directs the FSOC, of which the
Chairman of the Commission is a voting member, to consider ``assessing,
in a detailed and comprehensive manner, the climate-related financial
risk, including both physical and transition risks, to the financial
stability of the Federal Government and the stability of the U.S.
financial system.'' \10\ Executive Order 14030 directs the FSOC to
issue a report to the President identifying FSOC members' efforts ``to
integrate consideration of financial risk in their policies and
programs.'' \11\
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\10\ Executive Order 14030, 87 FR 27968.
\11\ Id. More specifically, Executive Order 14030 directs the
FSOC Report to include a discussion of: (A) The necessity of any
actions to enhance climate-related disclosures by regulated entities
to mitigate climate-related financial risk to the financial system
or assets and a recommended implementation plan for taking those
actions; (B) any current approaches to incorporating the
consideration of climate-related financial risk into their
respective regulatory and supervisory activities and any impediments
they faced in adopting those approaches; (C) recommended processes
to identify climate-related financial risk to the financial
stability of the United States; and (D) any other recommendations on
how identified climate-related financial risk can be mitigated,
including through new or revised regulatory standards as
appropriate.
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C. FSOC Climate-Related Financial Risk Report Recommendations
In response to Executive Order 14030, the FSOC issued the Climate-
Related Financial Risk Report in October 2021 with thirty-five
recommendations for the FSOC and its member agencies to: (1) Build
capacity and expand efforts to address climate-related financial risks;
(2) fill climate-related data and methodological gaps; (3) enhance
public climate-related disclosures; and (4) assess and mitigate
climate-related risks that could threaten the stability of the
financial system.\12\ A key recommendation is that member
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agencies, consistent with their legal authority, ``expand their
respective capacities to define, identify, measure, monitor, assess,
and report on climate-related financial risks and their effects on
financial stability.'' \13\ The Commission is seeking information and
feedback on how, consistent with its statutory authority, it may
responsibly act on the FSOC Report's recommendations. The Commission is
also seeking information to better inform any actions it may undertake
in the future to address climate-related financial risk.
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\12\ FSOC Report at 5-9.
\13\ Id. at 5 (Recommendation 1.3).
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D. Commodity Exchange Act and Commission Regulations
The derivatives markets that the Commission oversees pursuant to
the CEA are ``affected with a national public interest'' because they
facilitate risk management and price discovery ``through trading in
liquid, fair and financially secure trading facilities.'' \14\ The
purpose of the CEA is to serve this public interest through ``a system
of effective self-regulation of trading facilities, clearing systems,
market participants and market professionals under the oversight of the
Commission.'' \15\ The Commission's purpose also includes deterring
disruptions to market integrity, ensuring the financial integrity of
transactions, avoiding systemic risk, and promoting responsible
innovation and fair competition.\16\ In its oversight of these
derivatives markets, the Commission establishes appropriate tolerances
and guardrails to minimize market disruptions and promote a level
playing field.
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\14\ CEA sec. 3(a), 7 U.S.C. 5(a).
\15\ CEA sec. 3(b), 7 U.S.C. 5(b).
\16\ Id.
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The Commission's regulations apply to various derivatives market
participants, including, but not limited to, DCMs,\17\ SEFs,\18\
SDRs,\19\ DCOs,\20\ FCMs,\21\ IBs,\22\ SDs,\23\ MSPs,\24\ CPOs,\25\ and
CTAs.\26\ The Commission is seeking comment to consider how climate-
related financial risk may affect any of its registered entities,
registrants, or other market participants, and the soundness of the
derivatives markets. This includes assessing how registrants and
registered entities may need to adapt their risk management
frameworks--including, but not limited to, margin models, scenario
analysis, stress-testing, collateral haircuts, portfolio management
strategies, counterparty and third-party service provider risk
assessments, and enterprise risk management programs--as well as how
market participants may need to adapt their dealing, trading, and
advisory businesses in the derivatives markets. The Commission is also
seeking comment to understand how market participants use the
derivative markets to hedge and speculate on various aspects of
physical and transition risk, as they exist today and as they may
evolve in the future.\27\ The Commission aims to consider how it may
need to adapt its oversight of the derivatives markets, including any
new or amended derivative products created to hedge climate-related
financial risk.
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\17\ CEA sec. 5, 7 U.S.C. 7; 17 CFR part 38.
\18\ CEA secs. 1a(50), 5h, 7 U.S.C. 1a(50), 7b-3; 17 CFR part
37.
\19\ CEA secs. 1a(48), 21, 7 U.S.C. 1a(48), 24a; 17 CFR part 49.
\20\ CEA secs. 1a(15), 5b, 7 U.S.C. 1a(15), 7a-1; 17 CFR part
39.
\21\ CEA secs. 1a(28), 4f, 7 U.S.C. 1a(28), 6f; 17 CFR 3.10.
\22\ CEA secs. 1a(31); 17 CFR part 1.
\23\ CEA secs. 1a(49), 4s, 7 U.S.C. 1a(49), 6s; 17 CFR 3.10,
part 23.
\24\ CEA secs. 1a(33), 4s, 7 U.S.C. 1a(33), 6s; 17 CFR 3.10,
part 23.
\25\ CEA secs. 1a(11), 4k, 7 U.S.C. 1a(11), 6k; 17 CFR 3.10,
part 4.
\26\ CEA secs. 1a(12), 4k, 7 U.S.C. 1a(12), 6k; 17 CFR 3.10,
part 4.
\27\ See Rostin Behnam, Chairman, CFTC, Keynote Address at the
FIA Boca 2022 International Futures Industry Conference, Boca Raton,
Florida (Mar. 16, 2022), at https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam21.
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The Commission is considering climate-related financial risk
through various workstreams in addition to its FSOC participation.
Commission staff members participate on the FSOC's Climate-Related
Financial Risk Committee, including its scenario analysis and risk
assessment working groups. Commission staff members also participate on
Treasury's Financial Literacy and Education Commission Study on Climate
Change and the Financial Resilience of American Households and
Communities. Chairman Rostin Behnam serves as co-chair of the Carbon
Markets Workstream within the International Organization of Securities
Commissions' Sustainable Finance Task Force.\28\ Agency participation
in these initiatives is largely staffed from the Commission's Climate
Risk Unit, an interdivisional staff group led by the Office of the
Chairman that was formed ``to focus on the role of derivatives in
understanding, pricing, and mitigating climate-related risk, and
supporting the orderly transition to a low-carbon economy through
market-based initiatives.'' \29\
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\28\ Press Release, International Organization of Securities
Commissions, IOSCO's 2022 Sustainable Finance work plan strengthens
the organization's commitment to increasing transparency and
mitigating greenwashing (Mar. 14, 2022), at https://www.iosco.org/news/pdf/IOSCONEWS635.pdf.
\29\ Rostin Behnam, Chairman, CFTC, State of the CFTC, Testimony
Before the H. Comm. on Agric, 117 Cong. (Mar. 31, 2022), at https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam22; see also Press
Release Number 8368-21, CFTC, ``CFTC Acting Chairman Behnam Creates
New Climate Risk Unit'' (Mar. 17, 2021), at https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf.
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II. Request for Information
The Commission is seeking public feedback on all aspects of
climate-related financial risk as it may pertain to the derivatives
markets, underlying commodities markets, registered entities,
registrants, and other related market participants. In addition to any
general input, the Commission is interested in responses to the
questions posed below. The Commission may use this information to
inform potential future actions including, but not limited to, the
issuance of new or amended guidance, interpretations, policy
statements, or regulations, or other potential Commission action. The
Commission welcomes any relevant comments, including on related topics
that may not be specifically mentioned but that a commenter believes
should be considered.
Data
1. What types of data would help the Commission evaluate the
climate-related financial risk exposures of registered entities,
registrants, and other participants in the derivative markets that the
Commission oversees? Are there data sources that registered entities,
registrants, and/or other market participants currently use to
understand and/or assess climate-related financial risk? What steps
should the Commission consider in order to have better access to
consistent and reliable data to assess climate-related financial risks?
2. Would it help the Commission, registered entities, registrants,
market participants and/or the public to understand and/or to manage
climate-related financial risk if Commission reporting requirements
included information about climate-related aspects of listed
derivatives products, reported transactions, and/or open positions? Are
there data standards or definitions that the Commission should consider
incorporating into any such reporting?
3. What steps should the Commission consider to better inform the
public of its efforts to assess and address climate-
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related financial risks? What information could the Commission publish
that would be useful in this regard? What steps should the Commission
consider to make climate-related data more available to registrants,
registered entities, other market participants, and/or the public (as
appropriate and subject to any applicable data confidentiality
requirements) in order to help understand and/or manage climate-related
financial risk?
Scenario Analysis and Stress Testing
4. Are there any climate forecasts, scenarios, or other data tools
that would be useful to the Commission, registered entities, and/or
registrants to better understand the exposure of any registered
entities or registrants to climate-related financial risk and how those
risks translate to economic and financial impacts?
5. Are there any common scenarios, in addition to the scenarios
developed by the Network for Greening the Financial System \30\ and/or
the Financial Stability Board,\31\ that the Commission should consider
incorporating into its oversight, and/or consider for registered
entities and/or registrants?
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\30\ Network for Greening the Financial System, ``NGFS Climate
Scenarios for Central Banks and Supervisors'' (June 2020), available
at https://www.ngfs.net/sites/default/files/medias/documents/820184_ngfs_scenarios_final_version_v6.pdf.
\31\ See generally Financial Stability Board, ``Supervisory and
Regulatory Approaches to Climate-Related Risks Interim Report''
(Apr. 29, 2022), https://www.fsb.org/wp-content/uploads/P290422.pdf.
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6. Is a long-term (e.g., 30-year or 50-year) stress testing
scenario relevant for derivatives markets subject to CFTC oversight? Is
there a more relevant set of forward-looking climate relevant
scenarios? Should these scenarios account for geographical stress?
Should these scenarios try to target certain asset types? Can scenarios
be customized to be more relevant for certain types of derivatives
markets or registered entities?
7. Should registered entities and registrants be required to
incorporate climate stress tests into their risk management processes?
Do registered entities and registrants have the capability currently to
conduct climate-related stress tests? If not, what would be needed in
order to achieve this capability and on what timeline?
Risk Management
8. How might registered entities and/or registrants need to adapt
their risk management frameworks--including, but not limited to, margin
models, scenario analysis, stress-testing, collateral haircuts,
portfolio management strategies, counterparty and third-party service
provider risk assessments, and/or enterprise risk management programs--
to address climate-related financial risk?
9. Are there ways in which the Commission's existing regulations
and/or guidance could better address climate-related financial risk,
including credit risks, market risks, counterparty risks, and other
financial and operational risks? Are there ways in which the
Commission's regulations and/or guidance relating to risk management,
system safeguards, business continuity, governance, recordkeeping, and/
or internal audit could better address such risk?
10. Could the Commission's existing regulations and guidance better
clarify expectations regarding management of climate risks, taking into
account a registered entity's or registrant's size, complexity, risk
profile, and existing enterprise risk management processes? Would it be
helpful for the Commission to promulgate regulations or issue guidance
for registrants and/or registered entities regarding the implementation
of policies and procedures to measure, track, and account for physical
and transition risk?
11. DCOs' risk management frameworks focus on market risk aspects
with add-ons for liquidity, concentration, wrong way risk, settlement
risk as well other asset class appropriate risks. Should these risk
management frameworks directly incorporate climate-related risk
specific to clearing member firms, or their clients' climate-related
risks, and, if so, how?
12. Should the Commission consider amending its minimum capital and
liquidity requirements to better recognize climate-related risks?
Disclosure
13. The Commission staff is evaluating the Commission's public
disclosure, including public information, requirements to assess
whether existing requirements need to be updated to effectively provide
decision-useful, consistent, and comparable information on climate-
related risks. Are there ways in which updated disclosure requirements
could aid market participants in better assessing climate-related
risks?
14. A goal of climate-related financial disclosure is to offer
meaningful information about climate-related financial risks, and to
foster increased transparency into those risks. In connection with any
assessment of whether updated requirements are needed, what specific
disclosures, building on the Task Force on Climate-Related Financial
Disclosures' (``TCFD'') four core elements of governance, strategy,
risk management, and metrics and targets,\32\ would be most helpful for
the Commission to consider?
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\32\ Task Force on Climate-Related Financial Disclosures,
https://www.fsb-tcfd.org/ (last visited May 13, 2022).
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15. Should the Commission, consistent with its statutory mandate
and regulatory authority, consider the establishment by registrant
category (e.g., CPOs, CTAs, FCMs, IBs, and SDs) of climate-related risk
disclosure requirements based on the TCFD's four core elements?
16. Are there any standardized data formats, such as structured
data, that the Commission should consider for public climate-related
data disclosures? Would the use of complementary protocols, where
applicable, be helpful for comparability across other regulatory
agencies?
17. FSOC Report Recommendation 3.4 \33\ suggests that FSOC members
issuing requirements for climate-related disclosures consider whether
such disclosures should include GHG emissions, as appropriate and
practicable, to help determine exposure to material climate-related
financial risks. Should registered entities and registrants be required
to disclose information relating to GHG emissions?
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\33\ FSOC Report at 7.
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Product Innovation
18. What derivatives products are currently used to manage climate-
related financial risk, facilitate price discovery for climate-related
financial risk, and/or allocate capital to climate-benefiting projects?
Please explain how these products are used, negotiated, and traded.
What, if any, conditions, including market practices and/or regulatory
requirements, may constrain or promote their expanded use or
development to address climate-related financial risk? Are there ways
in which Commission regulations or guidance could better address
particular considerations relating to the listing of these types of
products for trading?
19. Are there customer protections or other guardrails that the
Commission could consider to promote market integrity in climate-
related derivatives products?
20. Are there any potential innovations in climate-risk-related
technology that could shape derivatives product innovation or are
otherwise likely to impact the derivatives markets overseen by the
Commission?
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21. Are the pricing and terms of climate-related derivatives
products affected by or related to the pricing and terms of other
products? Are climate-related derivatives products effective hedges for
a portion of the risks related to transactions in commodities other
than the commodities underlying the derivative products? Are there any
climate-risk factors that will specifically affect derivatives products
and their respective underlying commodities that should be addressed
within the Commission's regulations, guidance, or oversight of these
markets?
Voluntary Carbon Markets
22. Are there way in which the Commission could enhance the
integrity of voluntary carbon markets and foster transparency,
fairness, and liquidity in those markets?
23. Are there aspects of the voluntary carbon markets that are
susceptible to fraud and manipulation and/or merit enhanced Commission
oversight?
24. Should the Commission consider creating some form of
registration framework for any market participants within the voluntary
carbon markets to enhance the integrity of the voluntary carbon
markets? If so, what would a registration framework entail?
Digital Assets
25. Are digital asset markets creating climate-related financial
risk for CFTC registrants, registered entities, other derivatives
market participants, or derivatives markets? Are there any aspects of
climate-related financial risk related to digital assets that the
Commission should address within its statutory authority? Do digital
assets and/or distributed ledger technology offer climate-related
financial risk mitigating benefits?
Financially Vulnerable Communities
26. Consistent with the CFTC's statutory mandate and regulatory
authority, what factors are important, when the Commission analyzes
climate-related financial risks, to better understand the impacts on
households and communities?
27. Consistent with the CFTC's statutory mandate and regulatory
authority, are there any climate-related financial impacts or potential
policy solutions addressed to climate-related financial impact that the
Commission should consider as it pertains to financially vulnerable
populations in particular? Are there any steps that the Commission
should consider when assessing how the impact of climate change on the
derivatives markets and/or underlying commodities markets, or proposed
policy solutions to address such impact, may affect financially
vulnerable populations?
Public-Private Partnerships/Engagement
28. What mechanism(s), if any, would be useful for the Commission
to employ to foster public-private partnerships to address climate-
related financial risk within the derivatives markets?
29. Are there experts with whom it would be useful for Commission
staff to collaborate to identify climate forecasts, scenarios, and
other tools necessary to better understand the exposure of registered
entities and registrants to climate-related financial risks and how
those risks translate into economic and financial impacts?
30. What specific literature and research should the Commission
review and consult related to climate risks as applicable to the
derivative markets, underlying commodities markets, registrants,
registered entities, or other derivatives market participants?
31. During the IBOR transition, the Alternative Reference Rate
Committee was formed, in part, to identify best practices for
robustness of inter-bank offered rates. Would the formation of a
similar standard-setting committee be useful in the development of
climate-related indices designed for mitigation of the long-term risks
of climate change, such as temperature and sea level rise or carbon
concentration within the atmosphere, or the development of other
standards or best practices?
32. Assuming a standard setting committee or other body could
generate information to improve the hedging utility of long-dated
climate risk derivative products, what sort of impact might that have
on liquidity in those products, what benefits might be realized by
market participants, and could one expect a material improvement in
price discovery for long-term climate risk, in general?
Capacity and Coordination
33. What steps should the Commission consider in order to expand
its capacity to define, identify, measure, monitor, assess, and report
on climate-related financial risks and their effects on financial
stability? For example, what factors should the Commission consider
when it looks to prioritize staffing, training and expertise on
climate-related issues? Which analytic, data modeling, and monitoring
methodologies would be helpful to the Commission in this regard?
34. How should the Commission coordinate its efforts with
international groups and other regulatory bodies and supervisors? Are
there standards, definitions, or metrics that could facilitate the
sharing of relevant climate-related information amongst regulatory
bodies and supervisors, and/or their analyses and aggregation of
climate-related data? Are there specific steps that could be taken to
enhance global coordination and regulatory comity?
Issued in Washington, DC, on June 2, 2022, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Appendices To Request for Information on Climate-Related Financial
Risk--Commission Voting Summary and Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson and
Goldsmith Romero voted in the affirmative. Commissioners Mersinger
and Pham concurred. No Commissioner noted in the negative.
Appendix 2--Statement of Support of Commissioner Kristin N. Johnson
According to data gathered by the National Oceanic and
Atmospheric Administration's (NOAA's) National Centers for
Environmental Information, since 1980, the United States has
sustained more than three hundred weather and climate disasters,
including droughts, floods, severe storms, cyclones, wildfires, and
winter storm events that, in the aggregate, led to costs or damage
exceeding more than $1 billion.\1\ Notwithstanding our long history
of navigating severe-weather related events, the increasing
frequency, severity, and intensity as well as the rising costs of
these events raise important questions and remarkable concerns.
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\1\ NOAA, ``Billion-Dollar Weather and Climate Disasters:
Overview,'' available at https://www.ncdc.noaa.gov/billions/.
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In May of 2021, President Biden issued an Executive Order on
Climate-Related Financial Risk \2\ directing the Secretary of the
Treasury to engage with Financial Stability Oversight Council (FSOC)
members to consider issuing a report on member agencies' efforts to
consider climate-related financial risk. In response to the
Executive Order, the FSOC issued the Report on Climate-Related
Financial Risk (Report).\3\ The Report contains thirty-five
recommendations aimed to:
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\2\ Executive Order 14030 of May 20, 2021, Climate-Related
Financial Risk, 86 FR 27967 (May 25, 2021).
\3\ Financial Stability Oversight Council, ``Report on Climate-
Related Financial Risk 2021'' (Oct. 21, 2021), available at https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf.
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(1) Build capacity and expand efforts to address climate-related
financial risks;
(2) Fill climate-related data and methodological gaps;
(3) Enhance public climate-related disclosures; and
[[Page 34861]]
(4) Assess and mitigate climate-related risks that could
threaten the stability of the financial system.
Today's Request for Information on Climate-Related Financial
Risk (RFI) reflects the CFTC's established leadership in response to
requests to better understand the role of voluntary carbon markets
as well as the agency's commitment to ensuring a comprehensive
effort to understand how our markets, market participants, including
large and small agricultural and energy sector commercial and end
users may be impacted by physical risks or acute climate-related
events and transition risks or the stresses that result from shifts
in policies, regulations, customer preferences, and technology.
Consistent with the CFTC's mandate to promote the integrity,
resilience, and vibrancy of the U.S. derivatives markets through
sound regulation, the RFI seeks comments on how climate-related
financial risk may affect ``registered entities, registrants, or
other market participants, and the soundness of the derivatives
markets,'' including an assessment of ``how registrants and
registered entities may need to adapt their risk management
frameworks--including, but not limited to, margin models, scenario
analysis, stress-testing, collateral haircuts, portfolio management
strategies, counterparty and third-party service provider risk
assessments, and enterprise risk management programs--as well as how
market participants may need to adapt their dealing, trading, and
advisory businesses in the derivatives markets.''
These inquiries are well within the ambit of the CFTC's
statutory authority and continue a long-established tradition of
engaging in thoughtful dialogue with our market participants and
diverse stakeholders in order to understand their concerns related
to emerging and evolving risk management oversight. Among many
complimentary and comprehensive efforts, careful evaluation of
carbon markets may reveal a useful path for mitigating climate-
related financial risk. This RFI is an important step toward
learning from our market participants how these markets may help
them to hedge and efficiently manage existing and evolving climate-
related risk. Consequently, I support the Commission's RFI on
Climate-Related Financial Risk and I look forward to the public
responses.
Appendix 3--Statement of Support of Commissioner Christy Goldsmith
Romero
As expressed in President Biden's Executive Order on Climate-
Related Financial Risk, a whole-of-government approach will lead to
greater understanding of the financial risks that climate change
poses, and to the development of effective strategies to mitigate
those risks. The CFTC should be at the forefront of financial
regulatory efforts to understand, and identify actions to mitigate,
climate-related financial risks that impact CFTC-regulated markets.
This Request for Information reflects the Financial Stability
Oversight Council's recommendations for U.S. financial regulators,
seeks climate-related data, and asks questions about the appropriate
role of the CFTC in this emerging space.\1\
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\1\ Financial Stability Oversight Council, ``Report on Climate-
Related Financial Risk 2021'' (Oct. 21, 2021), available at https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf.
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I support the Commission's Request for Information because it
seeks public input on both physical risks and transition risks
related to climate issues that impact our markets. First, the
Commission can benefit significantly in understanding physical
climate risk directly from those in our markets who bear the risk.
Second, the United States has an opportunity to be a leader in
emerging voluntary carbon/sustainability markets, and public input
can help realize that opportunity.
As a market regulator, the CFTC's mission is to promote the
resilience, vibrancy and integrity of our derivatives markets.
Commodities markets have been impacted by significant climate
disasters such as wildfires, hurricanes, flooding, and other
disaster events that have caused devastating financial losses to
farmers, ranchers, and producers--losses that impact our derivatives
markets. In determining how to promote the resilience and vibrancy
of these markets, it is appropriate for the Commission to seek data
and input on climate-related physical risk from those in our markets
who bear the brunt of that risk as well as the public. The
Commission should be thoughtful and deliberate in any future action,
and consider potential consequences on farmers, ranchers, and
producers.
Additionally, the Commission's role extends to promoting
responsible innovation, which includes the evolution of climate/
sustainability products in our markets. There is a growing global
market demand for derivatives products that could serve as a hedge
against both physical risks of climate change as well as transition
risks as companies move toward a net zero environment. With a
growing number of companies making net zero pledges, there is
notable interest in carbon offset or sustainability products.
However, concerns about transparency, credibility, and greenwashing
may hamper the integrity and growth of these markets. I look forward
to public input on whether there are customer protections,
guardrails or standards that the Commission should consider as part
of its mission to promote market integrity and transparency and to
keep our markets free of fraud and manipulation. The Commission has
a critical role to play to ensure that our markets remain the
strongest and safest in the world.
Appendix 4--Concurring Statement of Commissioner Summer K. Mersinger
For the purpose of engaging the public through this Request for
Information (``RFI''), I concur because I will always support
efforts to engage market participants, industry, and the general
public in the policy-making process at the Commodity Futures Trading
Commission (``CFTC'' or ``Commission''). While other agencies may
take liberties with process in order to impose a ``government-knows-
best'' approach, traditionally, the CFTC has not been that agency.
However, I do not want my concurrence to be mistaken for support
of the substance of this RFI or all the questions being asked. I
have strong concerns with the discussion and several of the
questions included in the RFI that extend beyond the scope of our
statutory jurisdiction. Asking these questions causes confusion as
to the role that Congress has tasked the CFTC to perform in our
governing statute, the Commodity Exchange Act (``CEA''). Clarity
about our statutory jurisdiction is foundational to our ability to
successfully achieve the mission that Congress has set for the CFTC
in the CEA.
Reading the RFI, I was struck by the lack of concern or interest
in legacy agriculture contracts and futures markets. Growing up, I
watched drought, flooding, and violent weather destroy our
livelihood in a matter of hours. I remember many mornings riding in
my Dad's truck, surveying what was left of our corn fields after a
hail storm, or seeing the burnt spikes of the wheat that turned too
soon because of extreme heat and lack of rain. The financial risk of
climate and extreme weather is and has always been real, and our
farmers and ranchers have been using legacy agriculture contracts
and the futures markets to hedge those risks since the inception of
those markets.
With this in mind, where are the questions in this RFI about
financial risk due to climate change on our legacy agriculture
contracts and futures markets? What is not asked in this RFI is just
as important as what is asked. Not one question focuses on the
agricultural sector. Is this an unintentional oversight or a
strategic decision to cut agriculture from this conversation?
Unfortunately, the RFI gives no reason for leaving agriculture out
of the discussion when our agency's roots and history are embedded
in the agriculture community.
With respect to what is asked in the RFI, information is only
useful if it can further our efforts to achieve our mission, which
is why I find it concerning that we are requesting information that
we cannot use and not asking questions on well-functioning markets
where climate risk is already hedged. I can only conclude that the
RFI reflects either inadvertent ``mission creep'' at best, or a
power grab to expand the CFTC's authority at worst.
Specific instances in which the RFI extends beyond the CFTC's
jurisdictional boundaries under the CEA include, but are not limited
to, the following:
The first sentence of Section II (which sets out the
requests for information) states that the Commission ``is seeking
public feedback on all aspects of climate-related financial risk as
it may pertain to the derivatives markets, underlying commodities
markets, registered entities, registrants, and other related market
participants.'' \1\ Let me be crystal clear: The CFTC does not
regulate commodities markets. The CEA provides the CFTC with
statutory authority to regulate only derivatives markets, not
commodities markets. Requesting feedback on all aspects of climate-
related financial risk as it may pertain to underlying commodities
markets
[[Page 34862]]
covers a huge expanse of territory that is far outside the CFTC's
statutory authority over derivatives markets under the CEA.
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\1\ All italics in quotations from the RFI are added, unless
otherwise noted.
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Request no. 3 asks what steps the Commission should
consider, in addition to publishing information in its possession,
``to make climate-related data more available to registrants,
registered entities, other market participants, and/or the public
(as appropriate and subject to any applicable data confidentiality
requirements) in order to help understand and/or manage climate-
related financial risk?'' This suggests that the CFTC has statutory
authority under the CEA to order, as it deems appropriate, any
individual or entity to make data available for the benefit of
registrants, registered entities, other market participants, and/or
the public. It does not.
Request no. 18 asks what derivatives products ``are
currently used to manage climate-related financial risk, facilitate
price discovery for climate-related financial risk, and/or allocate
capital to climate-benefiting projects?'' In Section 3(a) of the
CEA, Congress found that the derivatives transactions regulated by
the CFTC provide ``a means for managing and assuming price risks
[and] discovering prices . . .'' In Section 3(b) of the CEA,
Congress then identified the CEA's purposes as including deterring
and preventing manipulation or other market disruptions; ensuring
the financial integrity of transactions; avoiding systemic risk;
protecting market participants from fraud, abusive sales practices,
and misuses of customer assets; and promoting responsible innovation
and fair competition.\2\ Nowhere in the CEA did Congress suggest
that it is a purpose of the CEA, or the mission of the CFTC, to
allocate capital--whether to climate-benefiting projects or
otherwise.
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\2\ CEA sections 3(a), 3(b), 7 U.S.C. 5(a), 5(b).
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Request no. 24 asks whether the Commission should
consider ``creating some form of registration framework for any
market participants within the voluntary carbon markets to enhance
the integrity of the voluntary carbon markets?'' The CFTC does not
have statutory authority under the CEA to create a registration
framework for market participants within voluntary carbon markets
unless they engage in activities relating to derivatives.
Request no. 25 asks whether ``digital assets and/or
distributed ledger technology offer climate-related financial risk
mitigating benefits?'' 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.
Request no. 27 asks whether there are ``any steps that
the Commission should consider when assessing how the impact of
climate change on the derivatives markets and/or underlying
commodities markets, or proposed policy solutions to address such
impact, may affect financially vulnerable populations?'' The CFTC
does not have authority under the CEA to take any regulatory steps
with respect to underlying commodities markets, regardless of
whether they affect financially vulnerable populations.
Request no. 30 asks what literature and research the
Commission should consult ``related to climate risks as applicable
to the derivatives markets, underlying commodities markets,
registrants, registered entities, or other derivatives market
participants?'' As noted above, Congress has not provided the CFTC
with regulatory authority in the CEA with respect to climate risks
applicable to underlying commodities markets.
I have no opposition to requesting the information we need to
consider the implications of climate-related financial risk in
fulfilling our mission under the CEA. But I am concerned that
requesting information on matters over which the CFTC has no
statutory authority and ignoring opportunities to ask questions of
market participants already using our markets to hedge their climate
exposure will not further the purported goal of this RFI.
Appendix 5--Concurring Statement of Commissioner Caroline D. Pham
I respectfully concur with the publication of the Request for
Information (RFI) on Climate-Related Financial Risk in the Federal
Register because it is imperative that the public has an opportunity
to provide input and share expertise.
In our work in this area, however, we must be mindful of our
statutory mandate: oversight of the commodity derivatives
markets.\1\ In particular, as the RFI recognizes, our markets are
``affected with a national public interest'' because they facilitate
risk management and price discovery ``through trading in liquid,
fair and financially secure trading facilities.'' \2\ Further, as
the RFI also recognizes, the Commodity Exchange Act mandates that
the Commission serve this public interest through our oversight of
``a system of effective self-regulation of trading facilities,
clearing systems, market participants and market professionals,''
and by deterring and preventing price manipulation and other
disruptions to market integrity, ensuring the financial integrity of
transactions in our markets, avoiding systemic risk, protecting
market participants from ``fraudulent or other abusive sales
practices and misuses of customer assets,'' and promoting
``responsible innovation and fair competition.'' \3\ This statutory
mandate bears repeating because it makes clear that the Commission
is a market regulator over our markets and products, market
infrastructure, market integrity, market conduct, market
participants, and market professionals.
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\1\ Commodity Exchange Act (``CEA'') section 2(a)(1)(A), 7
U.S.C. 2(a)(1)(A).
\2\ CEA section 3(a), 7 U.S.C. 5(a).
\3\ CEA section 3(b), 7 U.S.C. 5(b).
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We are not, for instance, a prudential banking regulator like
the Fed, OCC, or FDIC, nor are we a primarily disclosures-based
market regulator like the SEC. Keeping our focus on our markets,
products, and purpose--keeping our eyes on the ball--will help us
avoid the risk of diluting our limited resources and potentially
straying from our core expertise and responsibilities into areas
already tasked to others.
As we do our work on climate-related financial risks within our
statutory authority--such as by fostering the development of new
products and markets to manage physical risk and transition risk--we
also should be thoughtful when considering the steps we take. Any
actions that may impose new obligations and costs on our market
participants, especially end-users that rely upon our markets for
hedging, must be balanced and carefully considered.
For registrants that have other regulators and are already
subject to climate risk management frameworks, we should seek to
harmonize from the start with existing prudential and other
regulatory regimes in order to be efficient and avoid imposing
duplicative or unnecessarily burdensome and complex requirements.
And most importantly, I caution that for any potential future
Commission action, we must take care to consider the impact on small
entities and evaluate alternatives that would accomplish the
objectives of any potential rule without unduly burdening the
substantial numbers of growers, producers, and other end-users who
depend on our markets for risk management and price discovery.\4\
That is, after all, the original purpose of our markets and the
Commission.
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\4\ See Regulatory Flexibility Act (RFA) of 1980 (5 U.S.C. 601-
612), as amended by the Small Business Regulatory Enforcement
Fairness Act (SBREFA) of 1996, Public Law 104-121, 110 Stat. 857
(codified at 5 U.S.C. 601 et seq.).
[FR Doc. 2022-12302 Filed 6-7-22; 8:45 am]
BILLING CODE 6351-01-P