Introduction

Thank you, Vasiliki, for the invitation to join you today, and to the Hellenic Capital Market Commission for hosting this year’s IOSCO Annual Meeting.

As an independent agency of the U.S. federal government, the Commodity Futures Trading Commission (“CFTC” or “Commission”) is the primary regulator of the U.S. derivatives markets, including futures, options on futures, and swaps.  The CFTC’s mission is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.[1]  The CFTC exercises its oversight and civil enforcement authorities granted to it under the Commodity Exchange Act to promote market integrity, prevent price manipulation and other market disruptions, protect customer funds, and avoid systemic risk, while fostering responsible innovation and fair competition in the derivatives markets.[2]

While futures contracts on agricultural commodities began trading nearly 180 years ago in the Unites States, derivatives markets have a much longer history in many parts of the world, including here in Greece with olive commerce.  One of the earliest written records of futures trading involved the story of Thales.  Thales was an ancient Greek philosopher who used his skill in forecasting through studying the cosmos to predict a bumper olive crop.  Since the harvest was in the future and weather forecasting technology was limited in the sixth century B.C.E., any discussion of crop yields involved significant uncertainty and risk.  Based on his projections, Thales made agreements with the local olive-press owners to deposit a relatively low sum of money to secure the exclusive use of their presses during the harvest.  When the harvest-time came, Thales was proven correct and the bumper crop created high demand for presses, which proved profitable for Thales.  There was a significant benefit for the press-owners as well, who successfully hedged the possibility of a poor harvest.[3]

Recognizing the important history of the development of the earliest forms of forward contracts, price discovery, risk management through hedging, and the impacts of climate on global economies, I understand the critical role the CFTC plays with its oversight of the listing and trading of climate-focused derivatives on CFTC designated contract markets.  With this in mind, I appreciate the opportunity to share a few thoughts about our work at the CFTC in concert with our U.S. partners, and those across the globe.

The CFTC and Voluntary Carbon Markets

As I often say, the CFTC is not a climate regulator.  Indeed, it is not within our authority to require that market participants comply with a specific climate policy.  However, the CFTC is uniquely poised as the regulator at the forefront of climate-related risk management as firms and individuals will increasingly turn to the derivatives markets to mitigate climate change-induced physical and transition risk, and seek price discovery for new and evolving risk management products.  We are here to support the integrity of developing markets, and to encourage the growth of transparent, liquid, and robust markets in which farmers, ranchers, manufacturers, commercial end-users, and investors are able to participate to efficiently manage their risk in an increasingly uncertain global landscape.

Before my time as Chair, I also served as a Commissioner at the CFTC from 2017-2021.  During that time, I sponsored the CFTC’s Market Risk Advisory Committee (the “MRAC”), which convened the Climate Related Financial Market Risk Subcommittee. That subcommittee released a report in 2020, entitled Managing Climate Risk in the U.S. Financial System.[4]  The report was a first of-its-kind effort from a U.S. government entity to publicly examine, in substantial detail, climate-related impacts on the financial system.[5]

As a direct follow on, in March 2021, I announced the creation of the CFTC’s inter-divisional Climate Risk Unit (CRU) to better understand the role of derivatives in pricing and mitigating climate-related risk, and support the orderly transition to a net zero economy through market-based initiatives.[6]

These efforts complimented President Biden’s Executive Order 14030 (EO) on Climate-Related Financial Risk in May 2021, which directed the U.S. to, among other things, develop a whole-of-government climate-related financial risk strategy to leverage opportunities to enhance U.S. competitiveness and economic growth while managing physical and transition risks as the United States strives to achieve its target of a net-zero economy by 2050.[7]  The EO called for U.S. financial regulators, including the CFTC, to: (1) assess climate-related financial risk, including both physical and transition risk, in a detailed manner to the financial stability of the U.S. financial system; (2) facilitate climate-related financial risk data and information sharing amongst the Financial Stability Oversight Council (FSOC) member agencies; and (3) issue a report to the President on any efforts by FSOC member agencies to integrate consideration of climate-related financial risk into their policies and programs.[8]

As a bit of background, the FSOC is a 15-member council of banking, markets, insurance, and consumer protection regulators that is chaired by the Secretary of the U.S. Treasury and was established following the 2007-09 financial crisis to identify risks to the financial stability of the U.S., promote market discipline, and respond to emerging threats to the U.S. financial system.[9]  After several months of collaboration, including the efforts of my staff, the FSOC issued its Report on Climate-Related Financial Risk to the President in October 2021.[10]  The report contained over thirty recommendations that called for FSOC member agencies, among other things, to evaluate the need for new or revised regulations of supervisory guidance to account for climate-related financial risks and to build capacity and expertise to ensure that climate-related financial risks are identified and managed.[11] As an active member of the FSOC, I was happy to see the work of the MRAC Climate-Related Market Risk Subcommittee’s report reflected in this report’s recommendations.

I have taken the FSOC report’s direction to explore the potential for issuing guidance and building subject matter expertise to heart with the Commission’s work on the VCMs.  As an outgrowth of the CRU’s first year of exploration, I hosted the CFTC’s all-day convening on voluntary carbon markets (VCMs) in June 2022.[12]  The VCM Convening provided a forum for expert panelists from all corners of the VCMs to discuss carbon offset standards and quality initiatives, the trading ecosystem for offsets that can and do serve as the underlying asset for CFTC-regulated products, and what role the CFTC may play with respect to VCMs.[13]

The CFTC followed the VCM Convening with the issuance of a Request for Information on Climate-Related Financial Risk.[14]  This consultation sought 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 market participants.

After reviewing and evaluating dozens of comments in response to the consultation, two key takeaways emerged: (1) the Commission should use its anti-fraud and anti-manipulation enforcement authority to the fullest extent possible; and (2) the Commission should support the development of standards to promote the growth of high integrity carbon offsets.

The CFTC then launched two enforcement-related efforts in June 2023 aimed at building trust and rooting out misconduct in the voluntary carbon and larger environmental markets.  First, building on the great success of the CFTCs nearly 15-year-old whistleblower office, we publicly issued a whistleblower alert to help the public identify and report potential Commodity Exchange Act violations connected to fraud or manipulation in the carbon markets, including, but not limited to manipulative and wash trading, “ghost” credits, double counting, fraudulent statements relating to material terms of the carbon credits, and potential manipulation of tokenized carbon markets.[15]  Second, the Division of Enforcement announced the establishment of the Environmental Fraud Task Force,[16] which investigates potential fraud and material misrepresentations and misconduct regarding environmental products and strategies.

Recognizing that VCMs were, and continue to be, at a critical point in their development, we hosted a second VCM Convening in July 2023 to serve as the public launch of a workstream led by the CRU to produce draft guidance for public comment.[17]  I introduced this proposed Commission guidance on the listing of voluntary carbon credit (VCC) derivative contracts in person at COP28 in December 2023.[18]  This proposal and request for public comment was identified as one of the most important developments for the carbon industry[19] as it was the first proposed guidance on standards applicable to exchanges listing products aimed at providing tools to manage risk, promote price discovery, and help channel capital in support of decarbonization efforts.[20]

Looking to the broader U.S. approach to VCMs, I want to highlight the VCM Joint Policy Statement and Principles for Responsible Participation in VCMs that the Secretary of the Treasury, the Secretary of Agriculture, the Secretary of Energy, the White House and other members of the Biden-Harris Administration issued yesterday.[21]  The policy statement reflects the current status of the VCMs and the potential for these markets where high-integrity carbon credits represent real, additional, lasting, unique and independently verified emissions reductions or removals.[22]  The seven principles recognize the need for credit integrity (i.e., “supply integrity”), credible credit use (i.e., “demand integrity”), and market-level integrity, including facilitating efficient market participation and lowering transaction costs.[23]

The announced principles build off of a range of existing frameworks and stakeholder-led initiatives.[24]  Some principles focus on the unique perspectives of the U.S. market or the U.S. government, and they tie together nicely with the work of the CFTC, which was also highlighted as part of the announcement.[25]  I applaud President Biden’s whole-of-government approach to support consistent policy and the development of high-integrity VCMs.

This is critical as market participants from across all asset classes will increasingly turn to the VCMs and the VCC derivatives markets as they manage the impact of physical and transition risks related to extreme weather events and climate-related financial risk.  The CFTC’s role is to ensure that the developing VCC derivatives markets have integrity, adhere to basic market regulatory requirements, and remain resilient.  The CFTC will continue to do our part in supporting the responsible development of these markets by looking to finalize regulatory guidance in the coming months.

International Collaboration through IOSCO

The CFTC’s efforts to enhance the integrity of the VCMs has not been limited to its domestic work.  I am very proud to lead the work of IOSCO through its Sustainable Finance Task Force’s Carbon Market Workstream, which I co-Chair with European Securities and Market Authority Chair Verena Ross.  The Carbon Markets Workstream set out a little over two years ago with the aim of better understanding, and perhaps improving, the carbon compliance markets and VCMs that will play a critical role in the transition to lower-carbon economies.  In July 2023, IOSCO issued a set of twelve recommendations for the compliance carbon markets including for the market integrity, transparency, and structure of the secondary markets.

The Carbon Markets Workstream’s VCM efforts continue, and its trajectory, not unlike the one we’ve traveled at the CFTC, began with fact-finding and relied upon public outreach and engagement by focused leadership to fully illuminate the primary issues raised by these markets.  Where we hope to add value with IOSCO’s work on carbon markets is with respect to the integrity of the markets themselves—i.e., their functioning and governance.

Given that the VCMs are expected to grow significantly in the years ahead but are still a nascent market today, IOSCO initially identified 14 “key considerations” for the sound functioning of efficient, high-integrity VCMs and sought feedback on what role, if any, regulatory authorities could play in promoting integrity in these markets.  The goal of the November 2022 discussion paper was to outline regulatory considerations and build on existing good practices and principles from more well-established financial markets.

Considering the feedback received on the key considerations, IOSCO then issued a VCM consultation report in December 2023 at COP28 to outline a set of 21 “good practices” meant to promote the integrity and orderly functioning of VCMs.[26]  These good practices are addressed to relevant authorities and market participants, and aim to offer support for the sound development of VCMs globally.  As expected, given the high level of interest in VCMs, our consultation report generated a substantial number of comments and we have been working expeditiously over the last few months to think through how to take this feedback onboard as we prepare a final report.

Ultimately, I believe the VCMs will need the time-tested characteristics of already well-established financial markets to scale globally with integrity to effectively fund the transition to a lower-carbon economy.  My hope is that IOSCO’s efforts to set forth a pragmatic approach for good practices to regulate VCMs will serve as a valuable foundation to align the VCM regulatory frameworks internationally.  I also hope that the good practices will serve as a launch pad for capacity building to fully deploy these markets globally.  As we gather together today, I cannot stress enough how vital international collaboration will continue to be.

Conclusion

The VCC derivatives markets are relatively small today by comparison to established derivatives markets for agriculture, energy, and metals commodities.  However, as efforts like the CFTC’s forthcoming final guidance for VCC derivatives, the initiatives underway across the U.S. government, the work of IOSCO’s Sustainable Finance Task Force Carbon Markets Workstream, and the capacity building efforts from those of us in the room today take root, the supply of high-integrity carbon credits will begin to blossom and drive much needed private capital to land owners that are ready to sequester carbon today as well as finance new carbon removal technologies that are scalable for the future.  I am confident that our actions at the CFTC in concert with the policy statement and principles issued yesterday by the Biden Administration will serve as a powerful tool to bring confidence to the VCMs to propel us toward our net-zero target.

As I think back to Thales, I am reassured that in the 21^st century, we have more than the cosmos to help us manage risk. We now have the benefit of domestic and global collaboration, the reason we are here today, to foster derivatives markets that are based on sound market fundamentals and regulation to foster responsible and effective risk management.

Thank you.