CFTC Subcommittee Releases Report on Managing Climate Risk in the US Financial System

On September 9, the Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee of the Commodity Futures Trading Commission released a comprehensive report addressing potential risks to the financial system arising from, or related to, climate change. The report is the first of its kind from a US financial regulator. Its findings and recommendations are wide-ranging, frequently extending beyond the CFTC’s remit.

Key findings of the report include:

• “financial markets will only be able to channel resources efficiently to activities that reduce greenhouse gas emissions if an economy-wide price on carbon is in place at a level that reflects the true social cost of those emissions”;

• US financial regulators possess many flexible authorities and tools under existing legislation to begin to address climate change risks without further legislative action;

• insufficient analytical tools and data, as well as the absence of common definitions and standards for data and financial products, constitute a critical constraint on financial regulators’ ability to mitigate climate risks;

• under existing disclosure regimes, corporate disclosures on measuring and managing climate-related financial risks have not been “sufficiently useful to market participants and regulators”; and

• derivatives markets can play a role in mitigating various barriers that have historically reduced the capital allocated to sustainable economic activities.

The report contains 53 recommendations intended to mitigate climate-change risks to the financial markets. Among other things, the report recommends that:

• The United States should establish a fair, economy-wide price on carbon. The report asserts that this is the “single most important step to manage climate risk and drive the appropriate allocation of capital.”

• Federal financial regulators should integrate climate risks into their mandates, develop risk-mitigation strategies that address those risks, and undertake research on the potential financial impact of those risks.

• The Financial Stability Oversight Council incorporate climate risks into its oversight activities, as part of its mandate to identify and monitor threats to financial stability.

• Financial supervisors should conduct pilot climate-risk stress testing and require the entities they regulate to account for climate risks in their existing risk management frameworks.

• Regulators should update and amend existing disclosure frameworks to ensure the availability of more consistent and useful climate-risk disclosures by market participants.

The CFTC press release, including a link to the full report, is available here.

Katten plans to publish an advisory with more detailed coverage of the report.

CFTC to Hold an Open Commission Meeting on September 17

The Commodity Futures Trading Commission will hold an open meeting on September 17, from 10:00 a.m. to 3:00 p.m. ET, to consider adopting several final rules, including with respect to:

1. registration with alternative compliance for non-US derivative clearing organizations;

2. amendments to real-time public reporting requirements under the CFTC’s Part 43 rules;

3. amendments to swap data recordkeeping and reporting requirements under the CFTC’s Part 45 rules; and

4. amendments to the CFTC’s regulations relating to certain swap data repository and data reporting requirements.

The CFTC also will consider issuing a supplemental notice of proposed rulemaking with respect to its Part 190 bankruptcy regulations.

The meeting is open to the public via a live, audio-only feed. The meeting will take place via conference call because of the COVID-19 pandemic.

More information, including listening instructions, is available here.