I am pleased to join you for this inaugural meeting of the renewed Market Risk Advisory Committee (MRAC).  I want to thank Commissioner Johnson, as well as Bruce Fekrat, for bringing us together to discuss market risk issues.  I have met with many members of this committee to discuss the issues they face.  I look forward to the presentations, which address important issues, including clearinghouse governance, [1] benchmark rate reforms, [2] climate-change-related risks, [3]  and emerging future-of-finance issues, that I have recently discussed in statements and remarks.

One of my top priorities is to find specific ways to promote market resilience.  This is a natural priority for me given that I have spent my entire career in federal public service helping our nation recover from the financial crisis, and build a stronger, safer, more resilient financial system.  I worked as counsel to two Chairs of the Securities and Exchange Commission during the financial crisis, before spending more than a decade as the Special IG over TARP, within Treasury, helping our nation recover and rebuild.

When the crisis first hit, I can remember SEC Chairman’s staff in a meeting holding the circuit-breaker rules.  I noticed that all of our hands were shaking.  You see, there were no circuit breakers for individual equities in those days, but we did have market-wide circuit breakers.  As a consequence, we were discussing whether to shut down the entire market—a market that was not as resilient as it could have been.

So much has changed since the crisis.  With important Dodd-Frank Act improvements and new automated risk controls and rules, our derivatives markets have become more resilient than they were in 2008.  However, they are still subject to shocks and stress events, many of which cannot be addressed by technology alone.  Recently, our markets have weathered substantial volatility and high prices through the pandemic, only to be compounded by uncertainty and stress surrounding geopolitical events of Russia’s invasion of Ukraine.

We are now past the point of acknowledging that extreme but plausible events will continue to happen.  So it is more important than ever to prioritize the CFTC’s important mission to promote market resilience.  Exactly how we promote market resilience and in what areas is complex and will benefit from the input of stakeholders, including in this and other advisory committees.  Today, I will focus most of my remarks on two areas: promoting market resilience to climate-related risk and through governance issues surrounding clearing houses.

I.        My Priority for the CFTC to Promote Market Resilience to Climate-Related Risk

I look forward to the important discussion and continued work of the Climate-Related Market Risk Subcommittee that issued a groundbreaking report on the risks that climate change poses to our markets. 

Make no mistake:  Climate change could pose systemic risk to the U.S. financial system.  This was a central finding of the Subcommittee’s 2020 report, and a belief that I hold. 

Identifying, Understanding, and Monitoring Climate-Related Financial Risk 

The economic risks that climate change poses are significant, and it is important for the CFTC to identify and understand those risks and how financial markets are accounting for them.  While our markets have long served as a hedging tool for agriculture related to weather, extreme climate-related events are occurring with increasing frequency and intensity.  Extreme weather events are impacting critical infrastructure that was not designed to withstand these types of extreme events with any sort of regularity.  They are disrupting supply chains, degrading or destroying business assets, and stressing agricultural production.  As time passes, climate change is also affecting how crops can be grown, how livestock can be raised, and where production facilities can be located – with consequences not only for the price of goods and services, but also for the economic opportunities available to regions, communities, and workers across the United States.

I believe that as a market regulator, it is no longer a choice, but an imperative, for the CFTC to enhance its ability to identify and monitor climate-related risk that impacts our markets and market participants.  We have to be able to identify any systemic or sub-systemic implications.  Underestimating climate-related risk may affect market efficiency and effectiveness.  And since the risk has impacts across our economic sectors, there may also be systemic or sub-systemic implications.  In short, it is critical for the CFTC to understand how climate change impacts commodity and derivatives products and markets in regions across the country.

Promoting Market Resilience to Climate-Related Risk

It is one of my priorities that the CFTC promote market resilience to climate-related risk.  Derivatives markets serve as a tool to protect against future climate-related price uncertainty.  Markets provide a means to hedge financial exposures.  More generally, the forward-looking nature of derivatives markets means that they can provide key pricing information that helps to highlight potential areas of accumulating risk.  Derivatives markets can also help to ensure that businesses have access to the capital they need to protect or adapt physical assets hard-hit by climate events, and invest in emerging green technologies.  This is why transparent, well-functioning derivatives markets are essential.  To lose these important market benefits is to lose critical risk-mitigation tools.  That is why the CFTC has a critical role to play in promoting market resilience to climate-related financial risk.

How we promote market resilience to climate-related risk will continue to be a topic on which I am engaged.  I look forward to public input on the CFTC’s Climate Request for Information on Climate-Related Financial Risk, and I look forward to discussions in this and other advisory committees.

However, I do believe that in order to promote market resilience to climate-related risk, it is important to promote the resilience to climate-related risk through exchanges, clearing houses, and market intermediaries.  This is why I several months ago, I asked the National Futures Association to start to include climate risk as one of the many risks they consider when evaluating CFTC registered member firms – just as, for example, they address cybersecurity risks.  I also spoke with our Division of Clearing and Risk about how they look at climate-related risks for clearing houses, and we discussed their review of physical infrastructure risks related to climate-related events.  Additionally, exchanges and swap data repositories also should take climate-related risks into account in their own physical infrastructure, in addition to the broader administration of their risk management programs. 

This is why meetings of the CFTC’s advisory committees are so essential.  Through the sharing of information, expertise and ideas, we learn more, and gather more ideas for action—for action is what climate-related risk requires.

II.       My Priority for the CFTC to Promote Market Resilience through Governance of Clearing Houses

Finally, I would like to address promoting market resilience through governance of clearing houses.  In July, I voted for a proposed rule based on recommendations that came from this advisory committee because I viewed the proposed rule as a CFTC effort to strengthen the resilience of clearing houses to future risk. 

Clearing houses play an important public interest role – one of critical market infrastructure that fosters financial stability, trust and confidence in U.S. markets – by serving as a cornerstone to mitigating risk in U.S. markets.  Indeed, one important post-crisis reform to increase the resilience of our markets was to increase central clearing of trades in U.S. markets.  However, this concentration of risk in clearing houses led to the Financial Stability Oversight Council designating certain clearing houses as systemically important, underscoring the need for vigilant oversight by the Commission.

Under the Commission’s oversight, clearing houses have shown resilience in navigating an ever-growing list of recent market stress events.  However, uncertainty surrounding these events has driven home the need for the Commission to enhance its rules so that clearing houses strengthen their resilience to future risk.

While there may be differing opinions and viewpoints from the clearing house and its clearing members, I would hope there would be a shared goal of promoting market resilience.  When it comes to important matters related to governance issues, there will not be one answer.  The public interest role of clearing houses is best served when the clearing houses work with their clearing members who have much at stake as they shoulder the burden of losses and defaults.  Clearing houses, members, and end users should work collaboratively to decide how to increase the resilience of clearing houses, and how best to navigate risk during times or market stress. 

When it comes to this Committee’s recommendations on governance issues, I do not expect, nor desire, the Committee to reach unanimous consensus in recommending what a rule should be that the Commission should consider for vote.  It is the hard job of the CFTC Commissioners to make those difficult policy choices.  Instead, a discussion of the areas where new CFTC regulation and rules would be best served would be helpful.  Within each area, a discussion highlighting the diversity of perspectives within this committee would be extremely helpful to me in determining my views on policy.

Conclusion

I look forward to discussions in these two areas, in particular, to help the CFTC promote market resilience.  In these areas, the MRAC can serve a critical role in helping the CFTC to identify, monitor, and manage risks that might be transformed, hidden, underweighted, or simply overlooked.  This work is essential. 

Thank you again to Commissioner Johnson for bringing us together.

[1] See, e.g., Statement of CFTC Commissioner Christy Goldsmith Romero Regarding the Proposal to Strengthen the Resilience of Clearinghouses to Future Risk (July 27, 2022), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement072722.

[2] See, e.g., Statement of CFTC Commissioner Christy Goldsmith Romero Regarding the Clearing Requirement for Swaps Referencing Rates Less Susceptible to Manipulation Than LIBOR (Aug. 12, 2022), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement081222.

[3] See, e.g., Opening Statement of CFTC Commissioner Christy Goldsmith Romero Before the Energy and Environmental Markets Advisory Committee (Sept. 20, 2022), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement092022.