The U.S. Commodity Futures Trading Commission (CFTC) recently finalized guidance aimed at promoting integrity and transparency in the trading of voluntary carbon credit (VCC) derivatives. This move is intended to set clearer expectations for U.S. futures exchanges and swap execution facilities, ensuring that such platforms maintain robust standards when listing VCC derivative contracts. The guidance emphasizes mitigating manipulation, enhancing oversight, and fostering better market practices, reflecting the CFTC’s focus on protecting these evolving markets.

A more detailed analysis of the final guidance is included in our client alert, available at reedsmith.com.

Key points of the guidance

• Due Diligence and Oversight: The CFTC’s guidance outlines key factors trading platforms should consider when listing VCC derivatives, including the need for transparency, accurate pricing, and consistency in quantification methodologies for the underlying carbon credit products
• Ensuring Credit Quality: Exchanges should evaluate the crediting programs for VCCs, considering factors such as additionality, permanence, and risk of reversals
• Focus on Market Integrity: The CFTC expects exchanges to describe measures taken by VCC crediting programs that prevent double counting of emissions reductions and ensure robust inspection and tracking mechanisms; and to implement their own policies and procedures that prevent the risk of manipulation
• Guidance, Not Regulation: The guidance builds on existing principles but is tailored to address the unique characteristics and risks associated with VCCs. Although the CFTC does not intend to impose new legal obligations, this step signals an increased regulatory focus on the nascent VCC derivatives market

Industry implications

While the guidance is a proactive step towards stabilizing and legitimizing VCC derivatives, it has drawn criticism. Commissioner Summer Mersinger dissented, arguing that the guidance veers into political territory and imposes criteria unrelated to the regulatory obligations applicable to exchanges when listing new derivatives. This debate underscores the tension between establishing robust market rules and navigating the broader policy landscape around carbon markets.

Looking ahead

The CFTC’s guidance sets the stage for further regulatory developments in this space. With the potential for new enforcement actions and regulatory requirements, market participants should stay informed and prepared for an evolving regulatory environment that seeks to balance market growth with robust standards.