June 10, 2022
Cadwalader, Wickersham & Taft LLP
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On June 2, 2022, the Commodity Futures Trading Commission (“CFTC”) met with market participants for the first time to discuss the state and challenges of the U.S. Voluntary Carbon Credit (“VCC”) markets and at the end of the meeting, issued a Request for Information (“RFI”) on climate-related financial risks. This convening was an important step in the CFTC’s broader initiative to conceptualize its judicial reach across the commodity markets to environmental, social, and governance (“ESG”) issues more broadly.
From the outset, CFTC leadership and participants recognized that the CFTC has limited enforcement authority over ESG commodities and carbon credits in particular, allowing the CFTC to prosecute fraud and manipulation. Although ESG commodities are generally considered “commodities” under the Commodity Exchange Act of 1936 (“CEA”), the exclusive (or regulatory) jurisdiction of the CFTC is only triggered when derivatives or “commodity interests” are involved, which are deals with swaps, options and futures. Since most VCC markets, as well as ESG commodities markets, are spot or futures markets, the CFTC’s regulatory reach is limited as it is not a general consumer protection agency.
Nonetheless, the CFTC chose to hold the convening to address the increasing use of sustainability-related derivatives (“SLDs”) in both the OTC and regulated exchange markets, which are being used by market participants to mitigate climate risks as well as to safely fund ESG projects.
At the conclusion of the VCC convening, the CFTC released the RFI to “receive public comments on climate-related financial risks to enhance its understanding and oversight of climate-related financial risks related to the derivatives markets and underlying commodity markets.” The information received from the RFI will support the continued work of the CFTC’s Climate Risk Unit as well as the formulation of the CFTC’s future policies related to climate risk and the evolving spot and derivatives markets for ESG commodities.
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