The Biden Administration was elected to office with an urgent mandate to change our current trajectory towards catastrophic climate change. Climate-focused financial regulation, or the regulation of markets to accurately account for climate risk and the social and material costs of climate-damaging activities, must be a part of this coordinated federal response in order to meaningfully address climate concerns at the governmental level. An agency that is particularly key to this goal is the Commodity Futures Trading Commission (CFTC). The CFTC is one of the smallest federal financial regulatory bodies and yet it is responsible for regulating one of the country’s largest markets, derivatives. While it was originally founded to regulate futures trading in commodities, the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 expanded the CFTC’s mandate to include swaps markets and broadened the agency’s role in regulating other derivatives, in part due to their extreme volatility and outsized role in the 2008 financial crisis.
Today, the scope of the CFTC’s activities is set to grow again as it looks to develop, and enforce, robust regulation in order to protect consumers from the (climate) risk-laden precarity of the current market. Unfortunately, the rate of growth in this small agency’s funding and staffing has not kept pace with the size of its responsibilities, a fact that has the potential to slow or constrain its climate action. This has extended to vacancies in the CFTC’s appointed positions — where Biden’s delays in nominations have degraded the commission’s functioning and delayed its implementation of Biden’s agenda. To ensure that the CFTC can realize its full potential in supervising malpractice in the market it is currently charged with, as well as innovate, regulate, and enforce climate regulations for these same markets, this administration and Congress should work together to give it the resources it needs.
CFTC Has Long Lacked Necessary Capacity
Prior to Dodd-Frank, the CFTC oversaw the approximately $39 trillion domestic commodity futures market, for which it had a budget in 2010 of $169 million and just 605 full-time equivalent employees (FTE). In 2021, the CFTC’s regulated domestic market was estimated to be $319 trillion in swaps and $23 trillion in futures for a total market responsibility of $342 trillion, more than eight times the size of its pre-Dodd-Frank levels. However, the CFTC’s 2021 budget was just $304 million and its staff only 718 FTE.
As the CFTC’s regulatory responsibilities have grown over the past decade, its budget and personnel have stayed roughly stagnant, limiting the agency’s effectiveness in regulating such vast and unstable markets. The commission was considered understaffed and underfunded even before Dodd-Frank, and in 2010 there was already discussion of how the commission’s chronic under-resourcing threatened its regulatory effectiveness. This concern has only grown since the agency’s pre-Dodd-Frank days. In 2010, for example, while the CFTC staffed 605 FTE, the commission was outspoken in its need for at least 745 FTE to adequately service just its pre-Dodd-Frank activities. In order to comprehensively implement new responsibilities under Dodd-Frank, the commission requested an additional 119 FTE, for a total of 864 employees — a staffing goal that has never been met.
In 2013, following Dodd-Frank’s implementation, the CFTC had 682 FTE, making it only marginally better than it was in 1993, and still less than the commission requested in 2010. Similarly, in 2010, the CFTC’s enforcement department had 161 FTE and its market oversight division had 139 FTE. In 2021 the CFTC’s division of enforcement had only slightly grown to 169 FTE and its market oversight shrunk to include just 97 FTE. The agency did add another department (clearing and risk) during that period which aids in the commission’s market surveillance efforts, but this division is much more limited in its scope, compliance, and enforcement measures compared to the market oversight and enforcement divisions. Noting these shortages in 2013, Bloomberg BusinessWeek described the CFTC as “woefully understaffed, underfunded, and outmatched.” In 2014, then-commissioner Bart Chilton stated that the CFTC, “has the mandate, but not the money, to do the job.” At the time it was operating with a $215 million budget and 667 staff members. In 2017, former CFTC enforcement director Aitan Goelman highlighted that the CFTC did not have the capacity to meaningfully investigate or enforce against all of the “market manipulation, insider trading, front-running, and Ponzi scheming” that is actually happening in the market due to its inadequate staffing, tech resources, and budget. While a commissioner in 2018, current Acting Chairman Rostin Behnam stated that, “while the CFTC has continuously met and exceeded the challenges of bringing these markets under our jurisdiction, its efforts have never been matched with requisite resources… the CFTC cannot responsibly innovate and meet the needs of rapidly evolving markets and market participants absent additional funding” while addressing Congress’ cutting of the CFTC’s budget by $1 million that year. In 2020, Better Markets analyzed how “chronic underfunding of the CFTC has prevented Wall Street’s derivatives dealers from being effectively regulated and policed.”
The commission’s budget and staffing has increased since 2010, but there is a gross disparity in documented market growth versus the size of the CFTC’s resources. From 2010 to 2021, the commission’s budget increased by 80% (from $169 million to $304 million, unadjusted for inflation), and its staffing increased by 14.5% (605 FTE to 718 FTE.) These increases, however, came alongside an 876% increase ($39 trillion to $342 trillion) in the size of the CFTC’s observed market. In different terms, in 2021 the commission had $1 in its budget for every $1.125 million it was charged with regulating; for every staff member the commission retained, they were charged with observing $4.76 billion. These proportions offer a dangerous picture of the current state of regulation, and of regulators’ capacity to protect economic stability and policy compliance, amidst such wide resource disparities. While the CFTC has robust rules on its books, it takes significant capital to actually enforce them, a luxury the CFTC has not been afforded for decades. While the agency did engage in a record-number of investigations in 2020, totaling 113 for the year and almost doubling the agency’s 30 year average of just 58, a laudable achievement, it’s likely that that it is still far from enough to effectively minimize market risk and to protect the public from future crashes or fraud.
CFTC Has Broad Authority to Regulate Climate Risk
Climate disaster is likely to cause one of the aforementioned looming crashes, and the CFTC’s inability to fully enforce or audit its current rules and market threatens its ability to protect the public from the extensive financial risks which climate change poses. In fact, climate change will devastate the existing financial system if it is not regulated as the lethal threat it poses to market health and global financial stability, and current regulatory and market structures are woefully unprepared to safeguard against it. The CFTC has even acknowledged the threat of climate change to the economy in a report titled “Managing Climate Risk in the Financial System” that a CFTC sub-committee released in September of 2020. While the report opened with an acknowledgement of climate risk, it did not go far enough in its proposed interventions on the issue.
The CFTC has prefaced all effective climate-focused financial regulation with the need for a government-wide price on carbon. While environmentalists are divided on the issue, carbon pricing has historically not worked to achieve the emissions reductions which supporters have promised, and carbon pricing effectively amounts to a regressive tax structure that inevitably weighs the most heavily on low- and moderate-income consumers and communities of color. Ultimately, neither cap-and-trade structures or carbon taxes will effectively motivate the true-zero carbon emissions needed to meaningfully address — and reduce — the impacts of climate change. Further, carbon markets, due to their historic volatility, are not clearly defined as aiding effective carbon emissions mitigation efforts but instead can be an active hindrance to the effort, especially if not paired to drastic emissions reductions overall. Financial regulators also have no authority to establish carbon pricing, and placing an outsized focus on this issue effectively passes the responsibility for any climate to Congress, where action is unlikely given the tenuous political climate of the legislative branch. Regulators themselves have the ability, and responsibility, to enforce the financial stability policies implicated by the climate, and they are culpable if and when they choose not to.
The CFTC’s climate risk report is worth celebrating in many ways, not least in the importance of the federal acknowledgement of the dangers of climate change, but it’s also inadequate. First, the sub-committee is in part populated by groups such as JPMorgan Chase and Citigroup, both of whom were among the world’s leading fossil fuel financiers in 2020, as well as top global polluters BP and ConocoPhillips. These groups’ involvement in the report casts doubt on the climate “solutions” proposed within, given their long-established willingness to devastate the planet in service of their bottom-line. Not only this, but the CFTC, and all financial regulators, are responsible for regulating the financial system away from precarity and towards long-term sustainable infrastructure in every facet of the industry. Climate change, again, is one of the terminal threats to global financial security that financial regulators were created to safeguard address, and the CFTC must now do so without the bad-faith interventions of corporations and profiteers who continue to reap massive reward from increasingly risky, and climate-damaging, investment schemes. For this to work, and for all of the CFTC’s ongoing conversations regarding climate policy, the CFTC must instead center the voices of environmental advocates, public-facing organizations, and those communities most impacted by climate change rather than corporations.
The report is not entirely without merit. The sub-committee recommended that the CFTC implement climate-based stress testing to better understand the potential shocks to fiscal systems based on climate risks, join the Global Network of Central Banks and Supervisors for Greening the Financial System (NGFS), and modernize and standardize environmental, social, and governance (ESG) reporting such that the terms cannot be abused or otherwise misrepresented. Additionally, the report advocates for changes to the CFTC’s existing disclosure regime to include disclosure policies relating to climate risk and its long-term consequences. These are all key changes that have been suggested by environmental activists and highlighted in advocacy documents such as Public Citizen’s “Climate Roadmap for Regulation Reform.” While these aspects of the report offer a positive start, it accomplishes no immediate action. In fact, none of these recommendations have actually been implemented by the CFTC institutionally. While it is well within the agency’s power to apply for membership with NGFS, CFTC leadership has not done so. While it is within the agency’s power to re-define and begin enforcing clearer ESG standards, no such guidance has been released. While it is within the agency’s power to mandate climate-related disclosures, it still hasn’t.
Entirely missing from the report is a charge to set speculation limits on risk-laden, fossil fuel heavy industries and thereby disincentivize investment in environmentally damaging firms and industries — an action which Public Citizen has emphasized as key to the transition to a low-carbon economy. Also, notably lacking in the sub-committee report is a clear mandate for strict “capital and margins requirements to ensure firms and markets most exposed to climate risk are adequately protected,” a recommendation that Public Citizen, and the Center for American Progress, have advocated for multiple times. The subcommittee, by contrast, suggested only that the commission “review [its capital and margins] rules” after “undertaking a program of research” to further explore the impact of climate change and its risks.
The report is riddled with these qualifications, of action that might be necessary following the commission of a new report, or reviews that should take place after more research. It’s true that more data is necessary to fully understand the ways climate risk will impact the financial system, but putting off decisive action in the name of more reports, meetings, and studies is climate denial in itself. As noted by the Center for American Progress, “the longer regulators wait, the higher the potential costs. While a granular cost-benefit analysis is not possible, it is clear that the long-term social benefits of meaningfully reducing the likelihood of a climate-driven financial crisis far exceed the relatively minor private costs that come with stronger financial regulation.”
CFTC Acting Commissioner Rostin Benham has emphasized the need “for urgent and immediate action” relating to climate-risk, but has not yet implemented direct interventions or enforcement frameworks relating to climate change. Behnam has even acknowledged that regulators “have virtually all of the tools we need to start our work… [and] existing legislation already provides U.S. financial regulators with wide-ranging and flexible authorities that could be used to start addressing financial climate-related risk now.” Of course, with nothing specific to show for it, that acknowledgment means next to nothing. Steven Rothstein, head of the climate advocacy group Ceres Accelerator for Sustainable Capital Markets, has noted “with a very small window to prevent the next climate disaster, each [regulatory] agency must now provide specific timelines when they plan to put in place measures to protect the safety and soundness of our financial system, our institutions, our savings and our communities.”
The CFTC has started on its specifics — it established a Climate Risk Unit (CRU) charged with “focusing on the role of derivatives in understanding, pricing, and addressing climate-related risk and transitioning to a low-carbon economy,” which is intended to be the agency’s next step to the “Managing Climate” report. However, the structure of the unit remains unclear — including where the CRU will stand in the CFTC reporting hierarchy and thus the level of interagency clout the unit may carry. The commission has also not indicated whether or how the CRU will engage with its Division of Enforcement, unlike the SEC’s climate and ESG work group. This aspect is significant because studies, research committees, and long-delayed reports on what might address the climate crisis and its financial impacts should not come before urgent and enforceable policy on climate change. Juxtaposing the CFTC’s extended inaction on this regulation with its 11-day return on a bank-friendly, no-action letter limiting its own ability to enforce swaps-focused reporting requirements is a rather concerning sign of the agency’s current material priorities.
Additional Obstacles
It should be noted that some agency (in)activity comes as a result of Rostin Behnam remaining in an acting capacity as Commissioner, and the fact that the five-person panel has only two regulators (including Behnam) upon Dan Berkovitz’s exit from the regulatory body. As such, the commission does not currently have a quorum, and it has either had a Republican majority or been gridlocked between two Republican Commissioners and two Democratic Commissioners for the majority of the year, diluting the commission’s potential to achieve climate and enforcement goals. Contextualized amidst the CFTC’s staffing and budgetary shortfalls, these vacancies are unacceptable — and highlight how Biden’s delay in nominating regulators has had serious consequences for the functioning of these bodies.
Increasing Capacity
These decades-old capacity shortfalls must be addressed with urgency for new hiring, particularly in the commission’s enforcement and market oversight divisions. To start, this must be supported through Congress’ approval of the CFTC’s budget in FY22. The CFTC once again requested the ability to implement user fees to stabilize and expand its budget outside of congressional allocation, and it is essential that Congress finally authorize this request in order to support the Agency’s self-sufficiency. Additionally, Congress should approve the full budgetary request of $334 million for FY22 in operational costs, and to further support the agency in hiring an additional 30 employees. Really, the sheer breadth of the agency’s responsibility necessitates more congressional support than this request indicates, and ideally the agency would be finally fulfilled in its 2010 request for at least 864 employees.
Agency leadership must also ensure that, whatever new level of funding the agency receives, it is effectively deployed to hire quickly. As of June of this year (the most recent date on which personnel data was updated), the agency had actually lost a net total of four employees. At present, it only has four open job advertisements. Since taking charge of the agency earlier this year, Chair Behnam has been relatively quiet about these needs and about any plans to address them. Behnam should immediately take steps to expand hiring, improve recruitment and hiring processes, and appeal to the Office of Personnel Management for expedited hiring authorities wherever necessary.
For the CFTC’s new, essential policies such as climate-aware capital and margins changes to be as effective as possible, it must actually have the staff to enforce them. The commission must (in the immediate term) begin mandating climate-related disclosures from the entities it oversees. The CFTC also can and should implement climate-aware stress testing (both long and short term) based on the existing climate and financial crisis models posed by the multivariable consequences of wildfires across the west, the Texas freeze, and other extreme weather events that have already been observed.
The CFTC has the ability to address climate change. It must choose to do so, and must choose so soon.