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US ELECTIONS: Major course change unlikely at CFTC, chairman says


Ample work ahead implementing new rules

Democrats could emphasize climate risk

Washington — The Commodity Futures Trading Commission's overall agenda is unlikely change much if a Democrat is elected president, although there could be shifts in emphasis, such as an increased focus by the derivatives regulator on climate change, Chairman Heath Tarbert said Oct. 29.

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Speaking at the International Swaps and Dealers Association's policy conference, Tarbert said the CFTC unanimously adopted a five-year plan that runs through 2024 with high level goals.

But he suggested climate change could get more attention if former Vice President Joe Biden were to win the election and tap a new CFTC chairman.

"I think it's exciting because ultimately there's less regulation for the CFTC to do in that area, but it's more about allowing the derivates markets, the swaps markets, but also the futures and options markets to incorporate and think about how products could have climate risk addressed in them and to allow innovation," Tarbert said.

In a process kicked off by Democratic CFTC Commissioner Rostin Behnam, an advisory panel to the CFTC in September issued a lengthy report recommending that policymakers move urgently to measure and address risks that climate changes poses to the financial system, including by setting an economy-wide price on carbon.

Roles for regulators could include requiring climate risk disclosure, incorporating climate risk into stress testing, and incentivizing risk mitigation. According to the report, regulators could also work with the private sector to develop standard classification systems for physical and transition risks, and help support development of a robust system of climate-related risk management products.

In Tarbert's view, the attention to climate at the CFTC is unlikely to be highly partisan.

"I've tried to largely have a noncontroversial policy agenda, and to the extent there has been controversy," he said, "in many ways we're taking things that were controversial when introduced and sort of dialing them back to a point where they're less controversial."

Carrying out regulation

Regardless of who is in charge next, Tarbert said the CFTC will need to implement all of the regulations it has promulgated over the last 18 months. Those have included final rules on federal position limits, capital requirements and swap data reporting, all areas affecting energy derivatives.

"All of those things ... will take an immense period of time," he said. He also noted the CFTC will need to determine how it addresses digital assets, and issues regarding the resolution, recovery and structure of central counterparty clearinghouses.

Under Tarbert, the CFTC completed several long-awaited rules stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The commission voted 3-2 on Oct. 15 to finalize a rule setting federal speculative position limits on physical commodity derivatives, with adjustments to ensure common energy sector hedging practices are not disrupted. At the time, the panel's Democrats worried the rule lacked adequate guardrails and would relinquish too much of the CFTC's role to major exchanges. They also questioned whether the CFTC had adequately assessed crude oil market swings from last spring before acting.

A final rule imposing capital requirements for swap dealers and major swap participants also was adopted 3-2 on July 22.

Garnering bipartisan support, new swap data reporting rules were also put in place in September, with the intention of bolstering the derivative regulators' ability to monitor for systemic risk.

Recent steps

In other CFTC action, Tarbert issued a directive Oct. 27, limiting the use of "no-action letters" by staff to areas not suitable for general rulemakings. Such letters have been used to clarify when the CFTC will not recommend an enforcement action. Critics have argued that excessive use of the approach complicates compliance for new market entrants, while others have favored the flexibility to adjust regulation.

Tarbert, in a statement, said the no action relief should be limited to transitional compliance relief concerns, unique issues not contemplated by a regulation or extraordinary circumstances.

"To be clear, a no-action letter should not establish a new policy," he said, instructing staff to instead consider rulemaking for situations with industry-wide implications.

On Oct. 29, the commission also offered new enforcement guidance outlining scenarios where staff may recognize self-reporting, cooperation or remediation in enforcement actions. The guidance aimed to clarify how such recognition will be reflected in enforcement orders.