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CFTC Commissioners Address Climate Risks and the Energy Markets's picture
Commentary by Steven Lofchie

CFTC Commissioners addressed the relationship between climate change and the global financial system.

At a meeting of the CFTC Market Risk Advisory Committee, the Commissioners heard from experts and debated "(1) the impact of climate change on the future stability of the global financial system; (2) current domestic and international initiatives addressing financial risks related to climate change; (3) financial industry approaches to the management and mitigation of such risks, including key risk management, governance, and disclosure considerations; and (4) the challenges ahead for regulators and market participants in the derivatives industry."

CFTC Commissioner Rostin Behnam urged regulators to prioritize assessing climate-related market risk. Mr. Behnam asserted that natural disasters cost the worldwide economy $160 billion in 2018. He stated that failing to address climate-related financial risks will impede economic growth and likely affect rural communities disproportionally.

CFTC Commissioner Brian Quintenz lauded a decline in reported U.S. greenhouse gas emissions since 2005, and praised the role of U.S. futures and swaps markets in reducing carbon emissions. According to Mr. Quintenz, the markets have served as effective hedging venues for supporting private sector "ingenuity, discovery, and production of cleaner energy resources." Mr. Quintenz said that the futures and swaps markets, particularly those related to energy products, are under "significant threat."

Commissioner Quintenz also expressed concern about the potential impact of a proposal by prudential regulators (see previous coverage) to allow certain banking organizations to use an alternative approach for calculating derivative exposures under regulatory capital rules. According to Mr. Quintenz, the proposal would have a "profoundly negative impact" and "may do irreparable damage to the energy markets, inhibiting or preventing altogether the next revolution in energy production." (The proposal was criticized, see previous coverage, in a comment letter signed by four of the five CFTC Commissioners.)


CFTC Commissioners often express concern that the Federal Reserve Board ("FRB") overstates the risk of financial market products. Given the FRB's indirect control over the capital of many CFTC- and SEC-regulated entities through the FRB's dominion over bank holding companies, this raises a question as to whether the FRB is simply less comfortable with CFTC-regulated products and with securities than it is with traditional banking products, such as mortgages, and thus overstates the risk of the former vs. the risk of the latter.

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