CFTC Proposes Guidance on the Listing of Voluntary Carbon Credit Derivatives

Following a two-year examination of carbon markets, the CFTC proposed guidance on the listing of voluntary carbon credit ("VCC") derivative contracts.

Under the proposed guidance, the CFTC outlined factors that designated contract markets ("DCMs") should consider when addressing the CEA's Core Principle requirements and CFTC regulations on the listing for trading of VCC derivative contracts. The CFTC said that "VCC derivatives are a comparatively new and evolving class of products," and that the Commission "believes that guidance that outlines factors for a DCM to consider in connection with product design and listing may help to advance the standardization of such products in a manner that promotes transparency and liquidity." In the guidance, the CFTC focused on factors related to contract terms and conditions.

Comments on the proposed guidance are due by February 16, 2024.

Statements

CFTC Chairman Rostin Behnam highlighted the agency's vital role in fostering high-integrity markets. He said that the proposed guidance promoted transparency, liquidity and market integrity for evolving voluntary carbon credit derivatives and said that it aligned with IOSCO's efforts to enhance financial integrity in carbon markets.

CFTC Commissioner Kristin Johnson stated that the guidance "can help exchanges understand what compliance means in a still rapidly evolving market for voluntary carbon credits, one where there can be concerns about integrity, including for carbon credits listed on some of the largest registries, a lack of transparency, and uncertainty related to pricing." She also raised concern about fragmentation in the VCCs. She called for a broader regulatory framework and advocated for comprehensive measures, including risk disclosures, fair dealings guidance and establishing eligibility criteria for clearing to address the potential for fraud and to promote innovation in the voluntary carbon credit markets.

CFTC Commissioner Christy Goldsmith Romero underscored (i) the market's role in managing climate risk and (ii) the necessity for integrity and transparency. She advocated for bringing more of the market onto regulated exchanges and highlighted challenges like fragmentation and lack of transparency for the evolving derivatives markets.

Treasury Secretary Janet L. Yellen said that the CFTC's proposed guidance on voluntary carbon markets would enhance carbon credit integrity and foster responsible innovation. She said that the guidance aligned with Treasury's principles for net-zero financing and investment.