In a step that aims to facilitate the development of more carbon trading, the U.S. Commodity Futures Trading Commission (CFTC) has issued guidance for listing voluntary carbon credit derivatives.
Issued Friday, the derivatives regulator’s new guidance, which applies to regulated derivatives exchanges, sets out the factors for exchanges to consider when to list carbon credit derivatives for trading to ensure that they comply with derivatives rules and laws.
Among other things, the guidance outlines the factors for exchanges to consider in the design and listing process to guard against the listing of derivatives that are vulnerable to manipulation; and to ensure that trading markets have the capacity to “prevent manipulation, price distortion, and other market disruptions through market surveillance, compliance, and enforcement practices and procedures.”
The CFTC said its guidance may facilitate the standardization of voluntary carbon credit derivatives in a way that fosters transparency and liquidity.
“For the first time ever, a U.S. financial regulator is issuing regulatory guidance for contract markets that list financial contracts aimed at providing tools to manage risk, promote price discovery, and foster the allocation of capital towards decarbonization efforts,” said CFTC chairman Rostin Benham in a statement accompanying the new guidance.
The guidance was developed over five years of consultation, which included input from a wide range of sources including farmers, ranchers, loggers, traders, carbon credit rating agencies, exchanges, academics, and others, Benham noted.
The primary takeaway from the research, consultation, and public engagement in this area is a general conclusion that the CFTC “should act … to strengthen market integrity, transparency, and liquidity for derivatives with underlying voluntary carbon credits that are real, additional, permanent, verifiable, and each represent a unique metric ton of [greenhouse gas] emissions reduced or removed from the atmosphere,” Benham said.
However, the issuance of the guidance was criticized by CFTC commissioner Summer Mersinger, who called it “a solution in search of a problem.” Mersinger said the topic has received an unwarranted amount of attention from the CFTC and that it “includes veiled attempts to propagate controversial political ideologies best left to debate by voters and elected officials.”
“Focusing on ESG and net zero in evaluating derivatives contracts is a backdoor attempt to inject and memorialize certain political ideologies into CFTC regulatory decisions,” she said in a statement dissenting from the decision to issue guidance.
Despite the criticism, Benham said the new CFTC guidance complements the work underway in this area by the International Organization of Securities Commissions (IOSCO).
Benham, who co-chairs the work on carbon markets by IOSCO’s Sustainable Finance Task Force, along with Verena Ross, chair of the European Securities and Market Authority, said that IOSCO’s work, “has been focused on how regulators can promote sound market structure and enhance financial integrity in the [voluntary carbon markets] so that high-quality carbon credits can be traded in an orderly and transparent way.”
He noted that the group is continuing to review the results of a consultation that was launched in this area last winter.