By Lene Powell, J.D.
The effects of climate change on financial markets took center stage at a hearing of the Senate Agriculture Committee on the confirmation of Rostin Behnam for CFTC Chair. Behnam, who is currently serving as Acting Chair, has made climate issues a high priority for the CFTC, including establishing a Climate Risk Unit to explore the CFTC’s role in managing climate related financial market risk and supporting an orderly transition. Behnam received a number of questions on the topic.
CFTC Commissioner Dawn Stump was also present at the hearing.
In addition to the nomination of Behnam for Chair, two Democrats have been nominated for CFTC Commissioner, Kristin Johnson and Christy Goldsmith Romero. Their nominations will be considered separately. The Biden Administration is also expected to nominate a Republican for the fifth Commission slot.
Climate issues. According to Committee Chairwoman Debbie Stabenow (D-Mich), the U.S. is reaching a “tipping point” in the response to the climate crisis. Commissioner Behnam has been a “leading voice” in examining how the crisis can impact U.S. financial markets, said Stabenow.
Committee Ranking Member John Boozman (R-Ark) agreed that climate change and its potential impact on markets has been at the forefront of both domestic and international policy discussions, and that Behnam has made the issue a priority at the CFTC.
Behnam said in an opening statement that “derivatives will play a key role in market-based solutions” to the climate crisis.
“While focusing on the risks climate change poses is imperative, I do not want to lose sight of the opportunities endemic to a transition. I believe the CFTC must play a role in this market growth if the larger transition goals are to be met,” said Behnam.
Expanding on the role of the CFTC, Behnam said it is important for a regulator like the CFTC to be “part of the conversation” in the creation of markets like the carbon market envisioned by the proposed Climate Solutions Act. The CFTC can contribute decades-long expertise in establishing markets that have integrity and have the core components of a well-functioning market, pre-trade and post-trade transparency, clearing settlement, best practices, and other things that will preserve and ensure a fair, transparent market free from fraud and manipulation.
In response to a question from Boozman, Behnam confirmed that he “absolutely” envisions that such a carbon market would be “in the public sphere,” with credits being bought and sold by market participants rather than the government.
Behnam elaborated that on the one hand, the CFTC needs to support market-based solutions like innovative futures products and derivative products that help farmers and ranchers hedge risk. On the other hand, the CFTC has to support the energy transition, which could include developing and supporting carbon markets or coming up with solutions in the interest rate space or the currency space. This will enable investors to put money towards renewable sources of energy and other things that will help the energy transition, said Behnam.
Behnam said he does not envision hiring climate scientists directly at the CFTC, but rather using expert opinions.
On the impact of climate change on the financial markets, Behnam said he does not think it poses a systemic risk “at this moment” but sub-systemic shocks have been occurring across the country. For example, floods in the Midwest, forest fires in the West, and hurricanes in the Gulf Coast and East Coast are becoming more frequent and more extreme, and weather events like this could pose a larger threat to the financial system.
Behnam said if confirmed, he would look to convene a large group to talk to manufacturers, agriculture producers, energy providers, public interest groups, and financial institutions. The group would see what they are doing and then work along with them so that we can support managing and mitigating physical impacts, and ultimately supporting the transition in a thoughtful way that doesn't create unintended consequences.
Behnam said more generally, the CFTC would look to be part of the conversation around what are better disclosures for investors, and what are the best standards to have across the board so that systems to transition to a net-zero economy are efficient and effective. More directly within the CFTC’s sphere, the regulator will look at oversight of voluntary carbon markets and other innovative products that have to do with ESG or natural resource risk management.
Digital assets. Regarding digital assets, Behnam said it is important for the Senate Agriculture Committee to consider expanding authority for the CFTC in this area. While it would be a departure from the CFTC’s historical role as a derivatives regulator, it is critical to have a “primary cop on the beat” and the CFTC is prepared to do that if the Committee wishes, said Behnam. The total size of the digital asset market was $2.7 trillion as of yesterday, and of that, nearly 60 percent were commodities. He added that the CFTC has been “responsibly but aggressively” pursuing enforcement in this area for a number of years, including a $100 million case against a digital asset exchange, and a $40 million case against a stablecoin.
In response to a question from Sen. Sherrod Brown (D-Ohio), Behnam said with regard to digital assets, it is important to have a “full encompassing conversation” about prudential risks, banking risks, and clearing and settlement risks. In addition, it is important to have a conversation about market regulation and the purchase and sale of digital coins, and a regulatory structure for both the securities and the commodities.
Enforcement. Brown said he has concerns that the practice of allowing smaller penalties for entities that self-report violations does not work very well. He asked how the CFTC balances cooperation with good enforcement and ensuring that compliance improves.
Behnam said he is “fully supportive” of cooperation. In addition to finding the right balance and the right penalty level to deter future bad acts, it is important to build a culture of compliance and hold individuals accountable from the lowest to the highest ranks. Behnam said he thinks the CFTC has been “a little bit out of balance” in the past few years. If confirmed, he will reevaluate the CFTC cooperation program to ensure it is balancing incentives with the appropriate penalty, so that there are not recidivist actors in the future.
CFTC nominations and resources. Stabenow said she looks forward to holding a hearing “as soon as possible” for the two Democratic nominees, and also to seeing a Republican nominee put forward as soon as possible to complete the Commission.