The International Swaps and Derivatives Association (ISDA) published a whitepaper on analysis of regulatory oversight of voluntary carbon markets in the US. ISDA also responded to a consultation, from the Japanese Ministry of Economy, Trade, and Industry’s (METI), on carbon credit report; a consultation, of European Commission (EC), on development of an EU certification scheme for carbon removals; and a consultation, of the European Securities and Markets Authority (ESMA), on sustainability guidelines. In addition, ISDA issued a statement on the future cessation of Canadian Dollar Offered Rate (CDOR) tenors.
Below are the key highlights of the recent updates:
- The whitepaper on the regulatory oversight of voluntary carbon markets in the US discusses legal and regulatory questions related to voluntary carbon markets, describes the oversight of primary and derivatives markets under Commodity Futures Trading Commission (CFTC) rules, and explains why voluntary carbon credit derivatives are considered commodity derivatives by CFTC. The paper also recommends that CFTC could use its experience in regulating commodity derivatives markets as a blueprint for enhancing its oversight of voluntary carbon derivatives markets by employing a combination of private-sector and regulatory tools.
- ISDA welcomed the consultation report on carbon credit in Japan and noting the important role derivatives and financial institutions play in the carbon credit markets by increasing liquidity and transparency. ISDA also notes the importance of clarifying the legal nature of voluntary carbon credits to enhance the robustness of the voluntary carbon credits trading market. The Japanese carbon credit consultation summarizes domestic and international trends in carbon credits and related issues in Japan, proposing basic directions and specific measures for the appropriate utilization of carbon credits.
- In its response to the EC consultation on the development of an EU certification scheme for carbon removals, ISDA supports the intention of EC to create a sound carbon removal certification framework next year. ISDA notes that the lack of clarity on the legal nature of voluntary carbon credits is one of the key obstacles to creating a robust voluntary carbon credits market, which, in turn, will enable the development of a clear price signal for carbon and allow funds to be efficiently channeled toward emission-reduction projects.
- ISDA and the Association for Financial Markets in Europe submitted a joint response to the ESMA consultation on its draft guidelines on sustainability aspects of the Markets in Financial Instruments Directive (MIFID II) suitability requirements. The associations highlight the need for a simplified procedure for the determination of a client’s sustainability preferences. The response highlights that environmental, social, and governance suitability requirements should not be applicable when a client is pursuing hedging via over-the-counter derivatives.
- ISDA also published a statement in response to the announcement of Refinitiv Benchmark Services (UK) Limited (RBSL) on the future cessation of all remaining Canadian Dollar Offered Rate (CDOR) tenors. In May 2022, RBSL announced that, following a public consultation, calculation and publication of all remaining tenors of the CDOR will cease immediately, with a final publication on June 28, 2024 and the last day for publication of CDOR being June 28, 2024. In its response statement, ISDA describes how the terms of the IBOR fallbacks, the 2021 ISDA Interest Rate Derivatives Definitions, and the ISDA Benchmarks Supplement apply to the CDOR Cessation Announcement.
- Press Release on Paper on Voluntary Carbon Markets
- Press Release on Response to METI Consultation
- Press Release on Response to EC Consultation
- Press Release on Response to ESMA Consultation
- Press Release on Statement on CDOR
Keywords: International, Europe, Asia Pacific, Japan, Americas, US, Banking, Securities, Carbon Markets, ESG, Climate Change Risk, Derivatives, Sustainable Finance, Carbon Credit, CDOR, Interest Rate Benchmark, ESMA, EC, ISDA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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