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CFTC monitoring 'irregularities' in Texas energy markets after February freeze


Joins FERC in taking close look at mid-February events

Receives recommendations on climate risk

The US Commodity Futures Trading Commission is monitoring energy derivatives markets and communicating with other regulators, exchanges and stakeholders to address any threats to the market integrity, in light of the "tragic loss of life, limited clean water and power outages in Texas," the acting CFTC chairman said Feb. 23.

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"We are monitoring irregularities in the Texas energy markets following last week's freeze, specifically where there is a federal nexus with CFTC-regulated markets and listed products," said Rostin Behnam, who took over as acting chairman Jan. 21.

Behnam's comments, made during a CFTC advisory panel meeting, came a day after the Federal Energy Regulatory Commission also unveiled that its enforcement office was examining wholesale natural gas and electricity market activity during the mid-February extreme cold weather to determine whether there was any market manipulation or other violations.

The historic freeze-off in Texas and the Midcontinent the week of Feb. 15 slashed gas production several prolific basins, driving up spot prices, with some locations near or above $1,000/MMBtu. Amid surging demand in the power markets, real-time wholesale power prices in the Electric Reliability Council of Texas averaged near the offer cap of $9,000/MWh, and the Southwest Power Pool south Hub day-ahead on-peak LMPs hit $3,821.05/MWh for Feb. 18 delivery.

Highlighting 'weaknesses'

Behnam said the arctic blast highlighted weaknesses in US energy infrastructure that would likely be challenged more often with future, more frequent extreme weather events. He committed to ensuring CFTC-regulated markets remain fair and efficient and fulfil their functions of price discovery and risk management to "ensure reliable and low-cost energy for all Americans."

Democratic Commissioner Dan Berkovitz also pointed to the energy market events of mid-February.

"Going forward, it will be important for us to examine the causes of the current situation and incorporate any lessons learned into our financial and energy markets," and ensure markets adequately incorporate short- and long-term risk, he said.

The CFTC market risk advisory panel's agenda for the day included discussion of a widely circulated subcommittee report on climate, released in September 2019, that urged regulators move urgently to measure and address risks that climate change poses to the financial system. Backed by a diverse set of stakeholders, the report backed an economy-wide price on carbon to help mobilize a shift in capital and advised the CFTC on steps regulators could take to better grasp the risks and begin taking action.

Briefing on climate report

Bob Litterman, founding partner of Kepos Capital and chair of the CFTC's climate-related market risk subcommittee, highlighted recommendations that targeted the CFTC. Among those, the CFTC was encouraged to help catalyze climate finance market development, including by surveying market participants and potentially coordinating with other regulators.

Other recommendations urged the CFTC to review whether its rules are adequate to monitor and manage climate-related risk; to expand central counterparty stress testing and consider expanding risk-management rules and exposure reports to cover material climate-related risk. The report also recommended CFTC review whether financial market infrastructure is resilient against losses that could arise from physical impacts of climate change.

Discussing the report's number one recommendation — the need to set an economy-wide price on carbon to shift the flow of capital away from carbon intensive activities — Litterman likened the current moment to a time when he narrowly avoided crashing into a flaming gasoline tanker on the highway.

"It's time to slam on the brakes," he told the commission.

On a separate track, another stakeholder subcommittee advised the CFTC on ways to improve liquidity and diversity among liquidity providers trading on swap execution facilities and designated contract markets, without undermining the goal of swap dealer regulation. The subcommittee recommended in a report that the CFTC exempt swaps that are exchange-traded and that are centrally cleared from the CFTC's registration threshold calculations.

The recommendation drew some objections, including from Americans for Financial Reform, out of concern that it would be an abrogation of the CFTC's responsibilities if it were to exempt the majority of volume in some systemically important derivatives markets.