Watching Government: CFTC's role in cap-and-trade

Sept. 21, 2009
The US Commodity Futures Trading Commission expects to actively participate in any federal carbon cap-and-trade regulation, CFTC Chairman Gary G. Gensler told a US Senate committee on Sept. 9.

The US Commodity Futures Trading Commission expects to actively participate in any federal carbon cap-and-trade regulation, CFTC Chairman Gary G. Gensler told a US Senate committee on Sept. 9.

The commission should be ready because it already has experience regulating in three of the five broad regulatory components he believes would comprise a US cap-and-trade regime, Gensler said in testimony to the Senate Agriculture, Nutrition, and Forestry Committee.

"Over the past year, we have witnessed the consequences that regulatory gaps and inconsistencies can have on our financial system, the economy, and the American people," he said. "As Congress moves forward with potential cap-and-trade legislation, I believe it should ensure that there is a comprehensive regulatory framework over the expanded carbon markets, both the futures market and the cash market, without exception."

Effectively regulating carbon allowance trading will require several regulators' cooperation, Gensler said. The effort will need to involve standard setting and regulation, record-keeping (including maintaining a registry), trade execution system oversight, clearing of trades oversight, and protection against fraud, manipulation, and other abuses, he said.

Regulating trade

The first two components fall within other agencies' expertise because they "are better equipped to regulate the 'cap' part of 'cap-and-trade'," Gensler told the committee. But the agency has broad experience in the three other areas, he said.

"The commission already oversees trading and clearing of futures and options contracts based on sulfur dioxide, nitrogen oxide, and carbon dioxide allowances and offsets listed on the New York Mercantile Exchange and the Chicago Climate Futures Exchange [CCX]," said Gensler.

In August, Gensler said, under authority it received in last year's Farm Bill, the commission sought public comment on possibly classifying the carbon financial instrument contract traded on the CCX as a significant price discovery contract.

'Abundant experience'

Gensler added that the CFTC has "abundant experience" regulating centralized marketplaces and would be well-suited to regulate cash markets for emissions instruments if Congress desired.

"The emissions trading markets that the CFTC currently regulate are small relative to the expected growth of the carbon market as a result of cap-and-trade legislation. Still, the agency has the expertise to apply the same oversight to the much larger, national and mandatory market," Gensler said.

The agency would need more money to expand its staff and implement technology to oversee new carbon markets, he warned. CFTC is only now getting back to its staffing levels of the late 1990s, which were cut by 20% as markets grew five-fold and contract volumes climbed sixfold, he said.

But Gensler said his agency could do the job.

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