CFTC Commissioner Goldsmith Romero Shares New Proposals on Climate-related Financial Risk

CFTC Commissioner Christy Goldsmith Romero offered three proposals to promote market resilience against climate-related financial risk.

In her remarks before the Global Research Alliance for Sustainable Finance and Investment Annual Conference at Yale University, Ms. Goldsmith Romero argued that climate-related events can cause "severe economic losses to farmers, ranchers, and producers" which in turn "impacts commodities and derivatives markets." To address the "evolving, systemic risk" climate change poses to U.S. financial stability, Ms. Goldsmith Romero offered three proposals consistent with recommendations released by the Financial Stability Oversight Council to manage climate-related financial risk (see previous coverage).

• Horizontal Supervisory Review. Ms. Goldsmith Romero proposed that the CFTC conduct a horizontal supervisory review of climate risk management practices at exchanges and clearinghouses. She stated that the CFTC should also work with the National Futures Association to expand its review of large members, including market intermediaries, that already integrate climate risk into their risk management frameworks. She urged the CFTC to conduct an initial supervisory review that is flexible and draws on the CFTC's market expertise, rather than duplicating the efforts of other regulators. She stated that there should not be any supervisory consequences against a member firm for climate risk management deficiencies identified during the CFTC's initial review. Instead, she said that regulatory gaps found during the review can "help develop new capacities in working groups."
• Scenario Analyses on Climate Impacts. Ms. Goldsmith Romero proposed that the CFTC work with exchanges and clearinghouses to (i) gain a better understanding of the climate-related financial risk efforts already underway and (ii) conduct additional analyses using a common set of derivatives-market scenarios to examine the impact of shocks on financial stability. Ms. Goldsmith Romero said that the CFTC should mirror the FRB's "principles-based, exploratory" approach used in climate scenario exercises on the six largest banks. Ms. Goldsmith Romero emphasized increasing the CFTC's capacity to understand climate-related financial risk by examining (i) the "most extreme but plausible climate impacts" on the derivatives markets and (ii) interconnections and threats of potential contagions to financial stability.
• Climate Risk Management Principles. Ms. Goldsmith Romero proposed that the CFTC issue principles for managing climate risk for the "largest regulated entities." She argued that the principles will aid entities in developing strategies, utilizing resources and implementing risk management practices, while having the flexibility to curtail the principles consistent with their "individual business models and risk profiles." She added that the CFTC should harmonize its principles with the draft principles released by prudential regulators (see previous coverage), and, similarly, remind entities that their "public climate-related commitments should be aligned with and supportive of internal strategies and risk appetite statements."