4 December 2023

Explainer: CFTC Guidance for Exchanges Listing Carbon Credit Derivatives

The Commodity Futures Trading Commission (CFTC) has proposed new guidance to standardize listing voluntary carbon credit (VCC) derivative contracts on regulated exchanges.

The guidance aims to support the regulation of emerging climate-related products in a way that fosters market transparency, integrity, and liquidity.

MBK Search has looked at the proposed guidance and pulled out five big takeaways:

VCC Quality Standards Should Reflect Latest Certification Criteria

The CFTC guidance says exchanges should consider certain “key characteristics” when evaluating the eligibility of carbon credits. These include transparency, additionality, permanence, and robust quantification of emissions reductions. The guidance emphasizes that VCC quality standards outlined in contract terms should conform to the latest certification criteria applicable for that credit. It says this will help ensure market participants understand the economic attributes of the VCCs underlying a contract.

Exchanges Must Continually Monitor Appropriateness of Contract Terms

Given the nascence and evolution of carbon markets, exchanges will be tasked with continually monitoring the appropriateness of VCC derivative contract terms. This includes assessing whether changes to the crediting program or project types require updates to contract specifications to keep pace with VCC certification standards.

VCC Tracking and “Double Counting” Measures Should Be Demonstrated

The CFTC says exchanges should consider whether the registry system used to issue and track carbon credits has effective processes to provide clarity on credit ownership and retirement. Exchanges should also verify measures are in place to assure underlying VCCs are uniquely identified and not double counted toward multiple climate commitments.

Transparency Regarding Crediting Program Governance Is Key

Exchanges should evaluate the governance framework and independence of the crediting program issuing the carbon credits underlying VCC derivative contracts. This includes assessing decision-making procedures, public disclosures, and risk management policies.

Submission Contents Must Fully Explain VCC Contract Compliance

Given evolving carbon markets, the CFTC expects thorough explanations and qualitative details about how listing requirements are met when new VCC derivative contracts are submitted. Complete submissions with comprehensive supplemental data are vital for regulatory contracts to conduct proper assessments of novel VCC products, it says.

The comment period for the proposed guidance will be open for 75 days, and will end on Feb. 16, 2024. Comments may be submitted electronically through the CFTC Comments online process.

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