CFTC Commissioner Rostin Behnam and ISDA CEO Scott O'Malia offered regulatory recommendations to address climate-related financial market risk.

In testimony before the House Select Committee on the Climate Crisis, Mr. Behnam highlighted the role of derivatives in managing risks and price discovery. Mr. Behnam stated that the Market Risk Advisory Committee ("MRAC") is "perfectly situated" to explore the nexus of climate change and financial market risk and the role of regulators in mitigating these emerging risks. Mr. Behnam cited a recent MRAC Climate-Related Market Risk Subcommittee consensus report containing 53 policy recommendations regarding the management of climate-related financial market risk (see previous coverage).

Mr. Behnam urged Congress to consider recommendations from the report including:

  • establishing a price for carbon in order to address negative externalities (e.g., the cost of emissions on society) associated with its emissions;
  • engaging in collaborative efforts with the international community regarding the pricing of carbon, disclosures, and the analyses of climate scenarios; and
  • embracing changes in market structure and innovation, as they can result in expanded "capital flows to sustainable finance solutions" and generate substantial employment opportunities.

In a public statement, Mr. O'Malia agreed with Mr. Behnam on opportunities for international regulatory collaboration in the development of sustainable finance. Mr. O'Malia praised the Subcommittee report on climate risk management, likening the effort to ISDA's joint report with the Centre for European Policy Studies (see previous coverage). Additionally, Mr. O'Malia highlighted the ISDA Sustainable Finance Working Group's effort to identify and develop standard terms and definitions for environmental, social and governance ("ESG") derivatives. Mr. O'Malia emphasized both the role that derivatives may play in transferring ESG-related risk and the significant assistance that ISDA can provide by developing documentation to standardize such risk transference.

Commentary

The role that ISDA plays in the transference of risk relating to ESG is straightforward: for cases in which market participants seek to transfer ESG risk through contracting, ISDA facilitates that transference. The documentation and other services provided by ISDA help market participants effect transfers of risks, whether of ESG or of currency or other commodity prices, in the most efficient manner at the lowest possible cost.

The CFTC's role ought to be largely the same as that of ISDA, although carried out in a governmental capacity. Under Section 3 of the CEA, the role of the CFTC is to assist market participants in providing a "means for managing and assuming price risks, discovering prices, or disseminating pricing information through trading. . . ." It is not within the legislative mandate, nor within the internal skill set, of the CFTC to be providing direction as to how carbon should be priced any more than as to how gold, cattle or oil should be priced. The role of the CFTC is to provide a means by which market participants determine the price of goods. However laudable the Commissioner's aims may be, they are outside the appropriate scope of the CFTC.

Primary Sources

  1. CFTC Testimony, Rostin Behnam: Testimony of Commissioner Rostin Behnam before the House Select Committee on the Climate Crisis
  2. ISDA CEO, Scott O'Malia: The Role of Derivatives in ESG

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