CFTC eyes market structure questions arising from WTI futures swings

The Commodity Futures Trading Commission is eyeing steps to address "market structure considerations" that may have played into the late April WTI crude oil futures market swings, Chairman Heath Tarbert suggested July 21.

His comments came during a CFTC market risk advisory committee meeting that focused on coronavirus pandemic impacts on CFTC-regulated markets this spring, as well as future climate risk considerations for financial markets.

Among the significant volatility in derivatives markets this spring was the drop in CME NYMEX crude futures into negative territory on April 20.

Upcoming report, action

Tarbert said the CFTC has completed the initial draft of a detailed forensic study of the WTI futures market movements that it plans to release publicly this fall.

"The analysis points to the confluence of fundamental and technical reasons, including a few market structure considerations that have not previously [been] highlighted," he said. The CFTC will address those "to ensure that the price formation, price discovery and reliability and soundness of this important derivatives market that serves our US energy industry is further strengthened," he added.

A CFTC spokesman declined to elaborate on the market structure concerns or steps CFTC might be mulling.

In describing the WTI events, Tarbert noted there were unique macroeconomic factors at play, including a historically high supply of oil, the fight between Saudi Arabia and Russia for market share, and a simultaneous, unprecedented drop in demand due to the coronavirus.

CFTC Commissioner Dan Berkovitz had previously called for further study of WTI swings April 20 to determine if the decline truly reflected market fundamentals. He had expressed concern that the NYMEX May crude contract did not converge with the physical market on April 20, and suggested a full understanding of the contract's behavior during the spot month might provide valuable information about a variety of CFTC regulation. An aide to Berkovitz said the chairman had not yet shared information about the draft WTI market analysis.

In general terms, Tarbert, along with industry stakeholders and clearinghouse representatives during the virtual meeting, described the derivatives markets as performing well during the coronavirus onset despite the volatility and surging volumes.

"Far from amplifying risks throughout the financial system, the derivatives markets so far have acted as shock absorbers," internalizing the impact of market swings, unlike during the 2008 financial crisis, Tarbert said.

Alicia Chrighton of Goldman Sachs, representing the Futures Industry Association, noted that in terms of the total number of exchange-traded derivatives contracts, March significantly surpassed any previous month in the history of the industry. Among issues her group is working to address are operational and transparency concerns stemming from the high number of requests for clearing window extensions received by exchanges in order to accommodate the high trading volumes during periods of volatility, she told the commission.

From COVID-19 to climate

Separately, the CFTC received an update on the progress of an upcoming advisory panel report that will analyze and make recommendations about risks that climate change poses for the soundness and stability of the US financial system.

Democratic Commissioner Rostin Behnam described the COVID-19 pandemic as a harbinger of the potential consequences of climate change that has "further solidified my view that financial regulators must prepare for risks that climate change poses for our economy, market and public safety." Regulators in concert with private market participants must work together to build a more resilient, better prepared financial ecosystems for the future, he said.

Bob Litterman, founding partner of Kepos Capital, who chairs the advisory panel's subcommittee on climate risk, said that because of differences between climate risk and prior risks faced by the financial system, "we are doing an experiment of unprecedented scale on a complex system with little historical experience to guide our understanding of what an extreme but plausible outcome looks like," he said. "The bottom line of this report is that the US financial regulators must recognize that climate change poses serious emerging risks to the US financial system, and they should move urgently and decisively to better measure, understand and address these risks," he said.