The Market Risk Advisory Committee (“MRAC”) of the Commodity Futures Trading Commission (“CFTC”) met last week to discuss reports from its subcommittees on the following issues: Climate-Related Market Risk, CCP Risk and Governance, Market Structure, and Interest Rate Benchmark Reform. The meeting also featured a panel discussion on diversity and inclusion in the derivatives and related financial markets. The discussion on Climate-Related Market Risk featured discussion of the Climate-Related Market Risk Subcommittee’s report: Managing Climate Risk in the U.S. Financial System (“Report”), which it previously released on September 9, 2020. Subcommittee Chair Robert Litterman addressed the MRAC to discuss the Report’s findings and issue a call to action on climate change.
This is the first full MRAC meeting since the Report was released. The Subcommittee previously voted unanimously (34–0) to adopt the Report, which found that the financial regulatory system has an important role to play in measuring and managing climate risk and advocating for “a price on carbon” as the “most important step” for policymakers to undertake.
In his remarks to the MRAC, Climate-Related Market Risk Subcommittee Chair Robert Litterman explained that the risks of climate change “threaten our economy and the wellbeing of future generations.” He called on financial regulators to “recognize [that] climate change poses serious risk to the financial system” and to “move urgently and decisively to measure, understand, and address these risks … as well as to help increase the flow of capital to help build the net zero economy of the future.” He noted that “regulators already have wide-ranging and flexible authority” to address these risks, and identified “monitor[ing], manag[ing], and disclos[ing] risk” as important first steps in a market where there are currently “insufficient data and analytical tools” as well as a “lack of common definitions” to quantify and understand climate risk.
Litterman noted broad support from financial regulators for paying more attention to climate risk. Among other financial regulators, he cited the Federal Reserve Board’s risk management committee, the Treasury Department’s climate risk hub, and a recent letter by the New York Department of Financial Services as examples.
In terms of concrete policy solutions, Litterman identified “an economy-wide price on carbon” as a high priority to help markets adequately price in climate risk and to channel capital towards climate solutions. This echoes the “fundamental finding” of the Subcommittee’s report: that “financial markets will only be able to channel resources efficiently to activities that reduce greenhouse gas emissions if an economy-wide price on carbon is in place at a level that reflects the true social costs of these emissions.” While other solutions exist, the report found that “a price on carbon … is the single most important step to manage climate risk and drive the appropriate allocation of capital.” However, the report noted that imposing such a price was the job of Congress, not financial regulators.
The Subcommittee’s report already appears to have resonance with at least some members of the Commission. For instance, in a later portion of the MRAC meeting, Commissioner Berkovitz noted that many “100 year” events appear to be going on right now, pointing to the pandemic, the fires in California, and the recent extreme cold weather events in Texas. He suggested that climate change may force a reconsideration of what constitutes a “100 year” event.
Litterman concluded his remarks on a personal note, recounting an anecdote in which he and his wife narrowly avoided a car accident involving a gasoline tanker that led to a major gasoline fire on the highway. Had Litterman’s wife not warned him to slam on the breaks, he said, the two of them would both have died in the accident. Analogizing this potential disaster to the impending climate crisis, Litterman left the MRAC with a simple message: “it’s time to slam on the brakes.”