Commission Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts; Request for Comment

As previously announced on December 4, 2023, the U.S. Commodity Futures Trading Commission (CFTC) has now published in the Federal Register its consultation on a proposed „Guidance on Listing VCC-Derivative Contracts“. The guidance outlines specific factors that Designated Contract Markets (DCMs) should consider when contemplating the listing of Voluntary Carbon Credit (VCC) derivative contracts on their platforms. The guidance aims to ensure that VCC contracts align with regulatory standards, resist manipulation, and preserve market integrity. It also seeks to promote standardization of these products, enhance transparency, and increase their liquidity.
As we have described in detail the proposed content of the guidance in EventID 24175, we refrain from deep-diving into the proposal at this point to avoid redundancy. In brief, however, the guidance suggests that DCMs should consider various factors when listing VCC derivative contracts. Firstly, DCMs should only list contracts that are not readily susceptible to manipulation. This involves specifying the responsible carbon crediting program for eligible VCCs, ensuring transparency and robustness in quantifying emission reductions, establishing position limits, and confirming clear issuance, transfer, and retirement processes.
Secondly, DCMs must monitor a derivative contract’s terms and conditions relative to the underlying commodity market. This includes tracking the contract’s terms in relation to the actual commodity price, overseeing the availability of the underlying commodity for delivery requirements, and consistently assessing and ensuring the contract’s terms remain appropriate for physically settled VCC derivatives.
Lastly, DCMs must satisfy the product submission requirements under corresponding CFTC rules and regulations. This includes explaining how the contract complies with the Commodity Exchange Act (CEA) and its core principles, providing relevant facts and materials to substantiate claims about contract compliance, and offering additional information during the CFTC review process, if required.