CFTC Guidance for Listing Voluntary Carbon Credit Derivatives

This week the US CFTC approved proposed guidance (click here) regarding the factors a CFTC-regulated exchange should consider when listing voluntary carbon credit derivative contracts for trading in way that addresses the requirements of the Commodity Exchange Act (CEA) and CFTC regulations.

The CFTC believes that the proposed guidance will help to standardize voluntary carbon credit derivative contracts in a way that boosts transparency and liquidity, accurate pricing, and market integrity. The lengthy guidance is contained under the following headings:

• A Designated Contract Market (DCM) shall only list derivative contracts that are not readily susceptible manipulation;
• A DCM shall monitor a derivative contract’s terms and conditions as they relate to the underlying commodity market;
• A DCM must satisfy the product submission requirements under Part 40 of the CFTC’s regulations and CEA section 5c(c).

While the guidance is primarily applicable to US exchanges and originators of carbon credits, the text is relevant to firms that intend trading such contracts and relying on them to underpin their sustainability claims. As an indication as to where this topic ranks in terms of the CFTC’s priorities, the Chairman of the CFTC and two Commissioners made their views clear on the topic. Chairman Behnam and Commissioner Goldsmith Romero (click here and here) strongly support the proposals, while Commission Johnson (click here) does not believe the guidelines go far enough, issuing a lengthy statement on additional specific areas requiring enhancement.

The guidelines are open for comment for a period 75 days ending on 16 February 2024. Firms wishing to participate may comment electronically through the online portal (click here).