CFTC EEMAC Meeting

On June 27, the Commodity Futures Trading Commission (CFTC) Energy and Environmental Markets Advisory Committee (EEMAC) held a public meeting.  The meeting covered the state of the metals markets with a specific focus on copper and a discussion exploring wetland mitigation credits and how the CFTC could provide technical assistance in the creation of markets. 

Below is a summary of the meeting prepared by Delta Strategy Group. 

Commissioner Caroline Pham said the meeting’s program reflects how important derivatives remain to our economy and our future.  Metals such as copper are important inputs to the energy transition and energy infrastructure, raising even higher the stakes of today’s challenges such as inflation, rising interest rates, geopolitical events, and supply chain issues, and the need for market-based solutions.  

Commissioner Christy Goldsmith Romero said that, as metals markets are developing to address demand from the energy transition, the CFTC has a critical role to play to ensure that markets are working well.  We can, and should engage in vigilant surveillance, and combat any threats to markets’ orderly functioning. 

PANEL I: THE STATE OF THE METALS MARKETS 

• Copper will be a key component in the global energy transition.  We are seeing fundamental shifts in copper demand and use cases as it becomes a larger factor in the energy transition.  The majority of the world’s copper is consumed by China who also maintains the largest copper refining capacity.  Mining production, however, is primarily located in South America. 
• Financial players are increasingly looking for exposure to physical copper markets, and they now carry about 30 percent of all open interest in markets.  Derivatives are a portion of these markets, but there is also a significant amount of price discovery taking place in spot markets. 
• Market analysts see that the energy transition will account for 40 percent of total copper demand if the Paris Climate Agreements are met.  S&P believes that energy transition demand for copper will outstrip non-energy demand through 2050.  CME has highly liquid copper futures and options markets.  Copper futures traded 970,000 metric tons per day, making it one of the most globally relevant industrial metals contracts in the world.  The surging demand for electric vehicles will play an especially important role in driving demand for copper. 
• The gap between copper supply and demand is continuing to widen, and the anticipated copper shortfall from 2035-2050 will have serious consequences across the global economy.  Mining capacity will need to grow drastically as this gap continues to widen. 
• As economies around the world boost investments in renewable energy initiatives and infrastructure, market participants will be able to use the liquidity and transparency of futures markets to manage new price risks.  This will be important to both hedge risk and ensure price discovery. 

Discussion: 

Paul Hughes, Southern Company:  As we see demand and prices increase in these markets, do you expect to see them impact other markets in the energy or ag space?  Sammann:  When you see demand creep up in oil markets, there became a demand for alternatives which were found in corn for ethanol.  Copper could have this impact on other metals such as aluminum that might replace copper in some battery demand. 

Karen Wuertz, NFA:  How does retail participation in these markets compare to others?  Sammann:  Precious metals are effectively financial instruments, so they see more retail participation.  Physical markets like copper see lower percentages.   

Tyson Slocum, Public Citizen:  Will batteries adapt to shortages in copper by relying on different metal?  Sammann:  Yes, and our projections are only defined by today’s technology.  We fully expect markets to adapt and change with new technologies.   

Commissioner Johnson:  There are also many governance and trade perspectives for these markets.  Are there thoughts on the global coordination on these markets?  Sammann:  We are actively engaged in conversations especially since the LME collapse.  We are strong believers in exporting the governance of U.S. markets to other jurisdictions.  Other countries actively seek out our DCM and DCO practices because we are the best in the world. 

• We are trying to consolidate small projects so that users can provide a more cost-effective system.  In the past, if a public work system impacts wetlands, they would have to restore wetlands themselves.  Instead, this allows them to purchase mitigation credits from the bank sponsor.  Restorers then use the pooled money from this bank to create larger, well-designed, and ecologically valuable conservation programs.   
• We are facing issues with periodic shortages and extraordinary price jumps.  These issues stem from mitigation bank approval, construction, and credit release times being slower than market demand time frames.  There are also issues with a lack of accurate and timely data on credit supply, demand, and pricing.  
• We are trying to address these problems by speeding up the approval process for mitigation credits.  We are also working to track the progress for these projects against the credit schedules.  We are also working to develop a mitigation trading platform to improve data tracking.  We are considering ways that the CFTC could provide technical assistance to mitigation banking systems.  We need the ability to allow investors to purchase and resell credits and ensure that credits are expired once they are used.  Currently, there is no actual trading of credits.  Unlike carbon trading, these markets are very localized. 

Discussion: 

Paul Hughes, Southern Company:  What is the basis of the value of a single credit?  Rolband:  Wetland banks negotiate this with the Army Corps of Engineers.  This can be based on several factors such as the actual physical changes made to wet land or the level of nutrients you return to soil. 

John Melby, Xpansiv:  Are these tokens fungible once they are approved?  Are you looking to build out a registry or combining a registry with an exchange?  Rolband:  Yes, they are fungible.  We are considering both of these registry options.  We are open to input on the best way to structure the exchanges.  A key concern is the development of monopolies that can drive up the prices when supplies of credits are limited. 

Tyson Slocum, Public Citizen:  Who verifies these credits?  Is there an ongoing monitoring of these projects?  Rolband:  The Army Corps of Engineers and the Virginia Department of Environmental Quality cochair a review team.  The team has members from EPA, Fish and Wildlife, and local groups to ensure verification.  There is a ten-year monitoring requirement typically.   

Commissioner Summer Mersinger:  Is it possible for projects to create credits for these programs then selling carbon credits?  Rolband:  This is not allowed, but it has happened before.  We could consider it if we developed science that would allow us to measure carbon differently from other environmental gains, but we have not tried this yet. 

The purpose of this Subcommittee is to provide a report to the EEMAC that will evaluate what is required to ensure that energy markets remain resilient despite global strain.  The report will consider the state of various energy market infrastructure.  It will also examine if and how financial regulation can address current issues.  It will be chaired by Ian Lange of the Colorado School of Metals. 

The purpose of this Subcommittee is to provide a report to the EEMAC on the role of critical metals in transitional energy sources and their potential impact on derivatives markets.  The report will seek to identify markets that are used as components in transitional energy sources, examine how increased demand for certain metals impact derivatives markets, examine the issues around creating new derivatives markets for metals that will be used in transitional energy, and determine if and how financial regulation should change to address increased demand in these derivatives markets.