On January 18, 2010, a U.S. Federal interagency working group led by the Commodity Futures Trading Commission (CFTC) released a report on the oversight of existing and prospective carbon markets. The purpose of the report required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) is “to conduct a study on the oversight of existing and prospective carbon markets to ensure efficient, secure, and transparent carbon markets, including oversight of spot markets and derivative markets.”
The report concludes that emissions markets operate no differently than markets for other commodities and therefore recommends that both the spot and derivative carbon markets be subject to oversight in order to ensure that market participants will be allowed to trade and transfer allowances and carbon offsets, and to hedge price risk, in a fair and efficient manner.
The report further presents the objectives for the oversight of carbon markets.
- Facilitate and protect price discovery in the carbon markets to ensure that carbon markets reflect supply and demand conditions.
- Ensure appropriate levels of carbon market transparency to provide timely and accurate information to carbon market participants.
- Allow for appropriate, broad market participation to encourage market liquidity, facilitate price discovery and allow those directly and indirectly impacted by the regulation of carbon emissions to efficiently hedge associated risks.
- Prevent manipulation, fraud and other market abuses.
The trading of carbon related derivatives will fall under the scope of oversight mechanisms which will be put in place starting in July 2011 under the Dodd-Frank Act. These mechanisms will include central clearing of certain over-the-counter (“OTC”) derivatives; capital and margin requirements for dealers and major market participants and public reporting of transaction and pricing data.
The report also recommends further study on whether the spot market should be regulated. This will depend on the eventual structure of the primary and secondary spot markets.
In Canada, while regulation of OTC derivatives is being considered, the carbon markets have not received particular attention from the regulators.1