By Brad Rosen, J.D.
The International Organization of Securities Commissions (IOSCO) recently released its final report on Compliance Carbon Markets (CCMs), which contains 12 key recommendation proposals geared to facilitate the implementation of CCMs across member jurisdictions. The report covers a wide range of issues including the transparency and predictability of primary market decisions, market structures, allowance allocation mechanisms, market stability mechanisms, and market functioning and market integrity considerations.
According to Rodrigo Buenaventura, Chair of the IOSCO Sustainable Finance Taskforce, “This report intends to facilitate the implementation of CCMs across IOSCO-member jurisdictions in a swift and efficient manner.” He added, “It builds from the experiences of more advanced jurisdictions and gives other jurisdictions a solid starting point to avoid repeating past mistakes.”
Some preliminary regulatory and market considerations. IOSCO notes that much of the same oversight that helps enhance the integrity and transparency of the commodities markets is also applicable to CCMs. Moreover, some jurisdictions classify both allowances traded in spot markets and in derivatives markets as financial instruments such that they fall within the scope of securities regulation in those jurisdictions, including with regards to market abuse and money laundering. As a consequence, the regulatory frameworks referenced in the report seek to address general regulatory concerns such as (i) conduct issues, including conflicts of interest, (ii) potential lack of transparency, oversight and monitoring of trades, and (iii) fraud, insider trading and price manipulation.
The 12 key recommendations. The report identifies a set of 12 recommendations for CCMs in addressing issues around integrity and orderly functioning for both spot and derivatives markets. As noted in the report, the aim of these recommendations is to support jurisdictions seeking to establish new or to enhance their existing compliance carbon markets, and to do so in the most effective way possible, learning from the experience of others. The recommendations are as follows:
Recommendation 1: Relevant authorities should increase predictability and transparency in primary market decisions.
Recommendation 2: To foster fair, stable and competitive markets, relevant authorities in charge of primary market issuance should consider placing greater reliance on auctions over free allocation, where consistent with national authorities.
Recommendation 3: Relevant authorities should set the frequency of auctions in a manner that is predictable, transparent, and consistent with the size of the market.
Recommendation 4: When relevant authorities establish market stability mechanisms, any market intervention should be rule-based to allow for better predictability.
Recommendation 5: Relevant authorities should consider allowing a broad participation in primary markets, beyond compliance entities.
Recommendation 6: Relevant authorities should clarify the legal and regulatory classification of allowances in their jurisdiction.
Recommendation 7: Relevant authorities should encourage the scrutiny of auction performances.
Recommendation 8: Relevant authorities should consider establishing clear and robust frameworks for conducting market surveillance, overseeing entities’ behavior in spot and derivatives carbon markets and ensuring appropriate enforcement.
Recommendation 9: Relevant authorities should ensure that the relevant market infrastructures (e.g., trading venues, auction platforms, central counterparties, registries) are robust and properly regulated.
Recommendation 10: Relevant authorities should encourage the development of standardized derivatives contracts.
Recommendation 11: Relevant authorities should consider public disclosures about aggregate positions, as well as periodic public reporting derived from regulatory data.
Recommendation 12: Relevant authorities should, within their mandates, set clear lines of responsibilities and cooperation between authorities in charge of compliance markets at the primary and secondary market level, including both environmental and financial agencies as appropriate and promoting regulatory coordination between these entities.
CFTC Chairman weighs in. Rostin Behnam, the IOSCO Vice-Chairman and co-chair of the Sustainable Finance Taskforce Carbon Markets Workstream, as well as Chairman of the CFTC, had this to say about the IOSCO release: “The report reflects valuable input from a broad spectrum of public and private sector stakeholders, presenting a comprehensive set of recommendations to help jurisdictions promote the integrity and the effectiveness of compliance carbon markets as firms manage relevant risks and transition to a low-carbon economy.”
A few words about IOSCO. IOSCO is the leading international policy forum for securities regulators and is recognized as the global standard setter for securities regulation. The organization's membership regulates more than 95 percent of the world's securities markets in some 130 jurisdictions, and it continues to expand. The IOSCO Board is the governing and standard-setting body of IOSCO and is made up of 35 securities regulators.