Introduction

Good afternoon and thanks to the Commodity Markets Council for hosting me and my fellow Commissioners.  Our full attendance highlights the importance of CMC’s focus on ensuring the optimal functioning of derivatives markets for the benefit of end-users.  Your ability to manage risk safely, predictably, and without undue burdens directly impacts the prices American consumers pay for everything from food, to energy, to airline tickets and automobiles.

The global economy faced several distinct challenges in 2022--with volatile and uncertain commodity prices being one that dominated headlines throughout.  Last year at this time, we were anticipating Russia’s invasion while the Covid-19 pandemic persisted in variant forms.  Murmurs of forthcoming monetary and fiscal policy shifts were forming while the sonic boom of fintech disruptors emerging in our regulatory space required immediate attention.  It was early in my term as Chairman, still without a full slate of Commissioners, and priority number one would be engaging CFTC’s historical steady hand, transparent approach, and informed decision-making to support U.S. and global market resilience in the face of mounting volatility.

Returning to CMC today, my confidence remains unshaken. We rode out the perfect storm of externalities that historically captured 2022.  As the year progressed, and finally concluded, we found ourselves reflecting with certainty that our market structures and regulatory landscape served the American people and markets as intended.

But, as we’ve discussed time and time again, our work is never done.  There will be breakthroughs and crises, some predictable--some not so much, and then there is the everyday, business as usual.  We monitor, we manage, we continuously assess the relevant factors and categorically root out bad actors to ensure the derivatives markets serve their critical price discovery and risk management functions.

Naturally, 2022 raised concerns about whether rising prices in key commodities were due in some part to excessive speculation.  With commodity markets absorbing an unprecedented array of stress, generating volatility and creating conditions for a variety of market participants to explore strategies that may not reflect the same interests as main street Americans, heightened vigilance was in order, and the Commission’s approach intensified.

For the CFTC’s regulated markets, as I have made clear on several occasions, the agency’s surveillance staff surgically focus their trading analyses for any manipulative, inappropriate or disruptive conduct while Commission staff actively monitor compliance by exchanges, self-regulatory organizations, and intermediaries for trade processing, execution, and clearing.[1]  Explicit in our communications and messaging is that compliance with requirements to maintain appropriate margin, customer segregation, and capitalization must unfailingly be maintained.

Just as Russia’s aggression against Ukraine and other drivers of market volatility were intensifying in late March, I directed our Market Intelligence Branch (MIB) within the Division of Market Oversight (DMO) to analyze each commodity under strict parameters to examine the role of speculators and how, if at all, their participation in the market has negatively impacted price discovery.  This analysis is an ongoing effort aimed at informing the Commission and our deliberative process on a real-time basis.

Inasmuch as I will always prioritize transparency with stakeholders, the public at large, and Congressional inquiries, our role as a price-agnostic regulator, legal limitations, and policy considerations circumscribe the Commission’s ability to publicly disclose information and analyses associated with our ongoing oversight, surveillance, and enforcement functions.  Accordingly, while we vigorously continue our efforts in this area, and continually determine the universe of information that may be shared outside the agency without compromising our surveillance and enforcement programs, shortage of public commentary ought not be viewed as a lack of what is in fact some of the most sophisticated and aggressive market surveillance and enforcement in the world.[2]

Today, we can speak at a higher level, and, given the year we’ve had, I want to take a brief moment to revisit where the commodity markets took us last year.  I would also like to highlight how the CFTC’s Agricultural Advisory Committee (AAC), which I now sponsor, will consider some of the salient themes to emerge as they may present in 2023.

2022 Intensity

At a high level, the key factors impacting commodity markets in 2022 were: (1) the post-pandemic economic recovery characterized by rising commodity prices across all asset classes, contributing to overall inflation; (2) Russia’s invasion of Ukraine and related U.S. and E.U sanctions contributing to sharp price spikes in agricultural, energy, and certain metals markets; (3) monetary tightening and the policy response, with rate hikes by the FOMC totaling a 4.25% increase over the year and the U.S. dollar rising to multi-year highs before falling; (4) severe weather across the globe with heat, drought, and flooding impacting agricultural and energy markets; and (5) China’s Covid-19 lockdowns, reducing demand and impacting global supply chains.

The market turmoil related to the global pandemic tested the resilience of the derivatives markets and the efficacy of post-financial crisis reforms.  The volatility in global financial markets during March and April 2020 and throughout 2022 given geopolitical issues raised challenges for some market participants as liquidity demands rapidly rose in the face of initial margin increases and variation margin calls.[3]

Increases for commodity-related markets in 2022 were most strongly concentrated in the last weeks of February and the first weeks of March—the initial period of the Russian invasion of Ukraine.  However, they were not isolated to these weeks.  With both economic and geo-political concerns rising as we neared the end of 2021, and worries about energy supplies in the latter part of 2022, margin demands were elevated from September 2021 through the end of 2022.  Margin increases over 2022, though less true towards the end, were primarily driven by physical commodities, often led by energy products.  These increases left margin levels at or near record highs towards the end of the year across all of our major asset classes, with futures-and-options, which include commodities, representing a plurality of this total.

Margin levels towards the end of 2022 remained conservative relative to market conditions.  Even as commodity prices fell during the last months of 2022, margin posted at CFTC-regulated clearinghouses remained high—a common feature of margin models, with central counterparties working to ensure that they are adequately protected even in cases when volatility, or prices, rapidly shift or reverse course.

These elevated trends existed at an aggregate level, and at the more granular product level, most notably in energy.  Margin for all of the energy contracts remained significantly higher than at the same point in the prior year, even in cases like crude oil where prices had fallen far from recent highs.  We believe that, in part because of this, we observed no margin breaches over the last few months of 2022 for the major contracts in our markets.

Despite continued success and confidence in the clearing system, the record margin increases naturally place pressure on institutional balance sheets, both financial and non-financial.  The systemic nature of some central counterparties (CCPs) dictates that clearing policy must be constantly scrutinized, and tested under various scenarios.  This, I believe, is one of our most important responsibilities.  Later this year, the Commission will consider a final rule on CCP governance,[4] which will be a step to further strengthen the clearing system.  Additionally, I continue to participate in multiple global efforts to evaluate clearing policy, to ensure the safest, most transparent, and resilient ecosystem.

Without question, 2022 presented a challenging year across all commodity complexes, some more extreme than others.  In the years to come we no doubt will recall it as a period of time that put the CFTC on highest alert, and—in my view—gave the agency and its market experts an opportunity to shine on both the domestic and international stage as we worked tirelessly to ensure commodity markets continued functioning as intended for commercial end-users and the broader American public.  As Chairman, I couldn’t be prouder of our dedicated staff whose momentum is driven by their dedication to a mission everyone here and out there listening and reading benefits from. I look forward to continuing our trajectory into the new year.

2023 and the AAC

Ready for an opportunity to further engage directly with some of the agricultural markets’ greatest challenges in decades, I took over sponsorship of the CFTC’s Agricultural Advisory Committee.  Reflecting on the commodity roller coaster of 2022, our December meeting[5] featured panels on the impacts of geopolitics and weather on the agricultural economy, the agricultural value chain and sustainability issues, and shipping, freight, and storage impacts on the grain trade.  Following these panels, Committee members provided thoughtful recommendations as to future areas of inquiry by the Committee and some general market observations, including: access to FCMs by smaller market players in the wake of ongoing geopolitical issues; the impacts of the SPAN-2 initial margin framework and on agricultural derivatives; supply chain volatility and its impact on agricultural prices; derivatives data dissemination throughout the industry; and the impacts of carbon credit markets on agri-businesses with a focus on farmers and lenders.

On this final issue, I continue to believe the CFTC can play a role in voluntary markets.  As we have seen the listing and growth of listed futures on voluntary carbon credits, the agency’s relationship and responsibility is real.  These markets present an opportunity for the agricultural economy, but they must have integrity and adhere to basic market regulatory requirements.  I am working closely with international partners to provide recommendations on market infrastructure that hopefully can serve as a foundation for these emerging markets.

Returning to the advisory committee, it has yet to parse through all the recommendations and ideas, but they represent the types of issues I anticipate digging into over the next year.

Conclusion

Before we move forward from the recent past and focus on CFTC priorities going forward, I want to again thank CMC for hosting me and my fellow Commissioners and for providing a forum and a voice for the markets we serve.