Opening Statement of Commissioner Rostin Behnam before the Market Risk Advisory Committee

June 12, 2019

Introduction

Good morning and welcome to the CFTC’s Market Risk Advisory Committee (“MRAC” or “Committee”).  Since our last meeting in December, we have designated a new MRAC chair, Nadia Zakir.  The MRAC will benefit greatly from Nadia’s experience and knowledge of financial markets and regulatory policy.  I want to thank Chairman Giancarlo and Commissioners Quintenz, Stump, and Berkovitz for being here today.  I also want to thank and acknowledge the MRAC members and invited speakers who will participate on the panels today.

Finally, I would like to extend a special thanks to Alicia Lewis, the Committee’s Designated Federal Officer, Margie Yates, her team, and all of the Commission staff who work behind the scenes to make these meetings run smoothly.

The Agenda

Climate-related Market Risks to the Financial System

Today’s agenda focuses heavily on climate-related financial market risk.  I am very grateful to the speakers who will share their views on these critically important issues.

Worldwide economic costs from natural disasters have exceeded the 30 year average of $140 billion in 7 of the last 10 years.[1]  In 2018, the total cost was $160 billion.  Our commodity markets and the financial markets that support them will suffer if we do not take action to mitigate the risk of contagion.  As most of the world’s markets and market regulators are taking steps towards assessing and mitigating the current and potential threats of climate change, we in the U.S. must also demand action from all segments of the public and private sectors, including this agency.

Among the many lessons learned from the 2008 financial crisis, the interconnectedness of our global financial system is one, if not the single, most important.  All risk analysis, including risk derived from climate change, must include a holistic examination of the systemic relationships throughout all of our financial markets.[2]

The impacts of climate change affect every aspect of the American economy – from production agriculture to commercial manufacturing and the financing of every step in each process.  With that said, any solutions seeking to address and mitigate climate risk must be equally focused on ensuring the safety and continued prosperity of our urban cores and rural communities.  Failing to address financial market risks associated with climate change will impede economic growth, and most likely hit rural communities the hardest.

Recent extreme weather events across the nation’s Midwest, including record rainfall and reported tornadoes, have further elevated the impacts of climate change in the lives of everyday Americans.  Flooding and soil saturation resulting from torrential rains has impacted planting of major crops.  On June 2, the USDA reported that only 67 percent of U.S. corn was planted. [3]  The average percentage on this date from 2014-18 was 96 percent.  For soybeans, the number for 2019 was only 39 percent.  The average percentage on this date from 2014-18 was 86 percent.[4]

As recently as last week, heightened fire threats in northern California, at the very outset of wildfire season, brought fresh reminders of the devastation sewn across the western United States last year.  With all of these weather events paralyzing large swaths of our country, in fear of making decisions that could preserve their livelihoods— and even save lives— amidst a complex web of unknowns, I believe it is time to examine the relationship of these terrible, and sadly, more frequent events, to financial market risk and more generally, market stability.

The human element of these tragedies is real and heart wrenching.  But, the economic element is also just as real.  Risk exposures to insurance providers, asset managers, pension funds, commercial and retail banks— all users of derivatives markets—to price and shift risk, cannot be understated.  But, ultimately, the final risk often weighs on farmers, investors, customers, consumers, and homeowners.  We, collectively, must act now to address the persistent risks posed by climate change.

Looking to our international counterparts who have already begun taking important steps to address the impacts of climate change on financial systems is a start.  The Network for Greening the Financial System (NGFS) is a group of more than 40 central banks and supervisors, from around the globe, including the European Central Bank, the World Bank, and the People’s Bank of China, working to understand and manage the financial risks of climate change.[5]  Many of these central banks oversee the very same market participants that the CFTC oversees.

The Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (“TCFD”) is also doing very important work in this area.[6]  The TCFD is working to provide better access to data for market participants, with the goal of enhancing how climate-related risks are assessed, priced, disclosed, and managed.[7]

Assessing climate-related market risk must be a priority – and it must start now.

As sponsor of the MRAC, my hope is that this meeting will serve as an important first step towards a comprehensive review of what we can do now to prepare for and mitigate financial market risks.  My intention is to first take the necessary internal steps to form a MRAC subcommittee focused exclusively on examining climate related financial market risk.  The immediate next step is to identify experts from all relevant disciplines willing to contribute to this exercise.  Each step will be deliberate, measured, and determinative of what direction will be subsequently pursued.

Today, a range of experts from public and private sector organizations in the global financial ecosystem will share their experience and perspectives on climate-related market risk.  This committee and the Commission will benefit from their direct experience in considering, analyzing, and developing sensible, targeted approaches to beginning to address the challenges ahead for the CFTC and the derivatives markets.  The cumulative experience and expertise of today’s panelists can help identify market risks, shape targeted questions, and recommend data driven policy solutions to mitigate climate-related risk.

The Interest Rate Benchmark Reform Subcommittee

Following the morning panels, the MRAC will receive a status report from the Interest Rate Benchmark Reform Subcommittee.  Tom Wipf, Chairman of this important subcommittee, and also the newly appointed Chairman of the Alternative Reference Rate Committee (“AARC”) of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) will lead the discussion by providing updates on the Subcommittee’s three work streams:  (1) the Initial Margin Working Group, led by Biswarup Chatterjee; (2) the Clearing Working Group, led by Marnie Rosenberg; and (3) the Disclosure Working Group, led by Ann Battle.

I am proud of the accomplishments and progress of the MRAC and the Subcommittee’s work and contributions to the larger efforts by our domestic and international counterparts, as we all collectively work to make transition away from LIBOR successful.

Before we hear from the Interest Rate Benchmark Reform Subcommittee, it is my intention to establish additional subcommittees later this morning to address other important issues related to market risk.

Remarks by Steven Maijoor

Finally, I am pleased to welcome Steven Maijoor, the Chair of the European Securities and Markets Authority.  Mr. Maijoor will be discussing European Market Infrastructure (EMIR) 2.2, central counterparty stress testing, and Brexit.  I have also asked Chair Maijoor to share views regarding climate risk.  The CFTC, along with its international counterparts, is continually confronting the challenge of building and maintaining the appropriate regulatory framework for clearing in and among a population of CCPs (central counterparties) with unique risk profiles that will withstand routine shocks and demonstrate resiliency in a crisis.  I welcome the Chair’s engagement this afternoon so we can continue to move the dialogue forward in a productive manner.

Additionally, the continuing uncertainty surrounding the United Kingdom’s (UK) impending exit from the European Union (EU) creates market risks that have been much discussed and still need to be addressed.  Should a hard Brexit materialize, there will be a lack of clarity surrounding what each phase of a derivatives trade – from connecting a salesperson with a client, to executing the trade, to processing the trade through a CCP – will look like after Brexit.[8]  Where each of those actions take place will be another question, and how market participants geographically shift those functions will carry substantial risks.[9]

Whatever the disposition between the EU and the UK, the reaction to those risks should not be a deviation from the current paradigm of regulatory deference.  As Chairman Giancarlo has said repeatedly, having a healthy respect for regulations that ensure market transparency and stability, and which also respect local commercial custom, have become a mainstay of our global regulatory infrastructure.[10]  Deference to comparably robust regulatory regimes prevents overly burdensome and conflicting regulatory requirements from reducing market efficiencies, while ensuring that global markets are successfully protected.

While we will continue to look for ways to build consensus across borders, the CFTC will take necessary actions to preserve this regulatory paradigm.  I look forward to working with both my fellow commissioners and foreign counterparts to make sure that derivatives markets are prepared to deal with the complex implications of Brexit.  As part of that process, I look forward to hearing from Mr. Maijoor and finding ways to maintain and promote deference where appropriate.