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Commodity Futures Trading Commission (“CFTC,” “Commission”) Markets Risk Advisory Committee (MRAC) Climate Related Market Risk Subcommittee (“Subcommittee”) Notice
Submitted to   
The Institute for Agriculture and Trade Policy (IATP) appreciates the opportunity to respond to the issues identified in the Notice. IATP first wrote on June 19, 2019 to the Commission on these issues. We are responding to four of five topics outlined in the Notice, plus our “Urgency and ambition” topic. IATP hopes that these brief comments will help the Subcommittee prepare its report for MRAC. We look forward to reading the report and to commenting on the CFTC’s proposals for implementing the “actionable materials” recommended by MRAC following its review of the report. 
Challenges to evaluating and managing climate-related financial and market risk

Sophisticated public relations campaigns of climate change disinformation have delayed, stunted or even reversed government and market participant policies and actions to mitigate greenhouse gases (GHGs) and adapt to climate change in response to increasingly urgent and dire consensus scientific reports, e.g., the Fourth National Climate Assessment. One econometric study projects that with a 4 degree Celsius increase, annual global climate change damage will be $23 trillion by 2100.5 But more important for risk managers and regulators than the scale of damages is the short-term structure and sequence of asset reevaluations and default cascades that must be managed in equities and derivatives markets to prevent market and financial system collapse.6 What should the Subcommittee report recommend to MRAC concerning possible CFTC studies, proposed regulations or guidance, new data reporting requirements and legislation to reduce the impact of disinformation and to increase the quantity and quality of relevant climate economic information to enable evaluation and management of  financial and market risk?

  • The Subcommittee should recommend that the CFTC establish a Climate Change Financial Regulatory Lab to include a portal for consensus science climate change information; an electronic library on climate change information affecting specific underlying assets of CFTC regulated contracts; and a platform for machine learning about climate change and for beta testing climate change related financial products. Alternatively, the Subcommittee could recommend that such a Lab be established in a self-financing agency, e.g., the Office for Financial Research, for use by all financial regulatory agencies.  
  • The Climate Bond Initiative expects global issuance of Green Bonds by governments and corporations to rise to $350-400 billion in 2020 from $255 billion in 2019. 8 It is tempting to grow this market by allowing Green Bonds to become underlying assets for derivatives trading, e.g., exchange traded Green Bond funds. Voluntary adherence to bond issuance standards is just one reason that the Subcommittee should advise the CFTC to resist this temptation.
  • According to Frank Ackerman, the shortcomings of regulatory cost-benefit analysis (CBA) become most evident in worst case economics, such as the 2007-2010 default cascades that resulted in $29 trillion in Federal Reserve emergency loans. The Subcommittee should not advise the Commission to apply in climate related rulemakings or staff papers conventional CBA, e.g., leading to conclusions about a purported “global war on energy freedom.” The Subcommittee should recommend that the CFTC staff develop a CBA model based on both historical data and the nonlinear asset impacts of climate change related weather events in  worst case economic scenarios. 

To continue reading, download the full letter here

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