to designated contract markets looking to list VCC-related derivatives serves as a further reminder of the CFTC’s determination to address potential abuse in this still evolving market.Footnotes1. CFTC Issues Proposed Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts, CFTC, Dec. 4, 2023, Release Number 8829-23, https://www.cftc.gov/PressRoom/PressReleases/8829-23?utm_source=govdelivery 2. Statemen of Chairman Rostin Behnam on the Proposed Commission Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts, CFTC, Dec. 4, 2023, https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement120423 3. Help Wanted: CFTC invites whistleblowers to look for fraud and manipulation in carbon markets, Allen & Overy, July 3, 2023, https://www.allenovery.com/en-gb/global/blogs/investigations-insight/help-wanted---cftc-invites-whistleblowers-to-look-for-fraud-and-manipulation-in-the-carbon-markets 4. Federal Register at 19. 5. CEA section 5(d)(3), 7 U.S.C. 7(d)(3) 6. Federal Register at 22. 7. CEA Section 5(d)(4), 7 U.S.C. 7(d)(4). See also 17 CFR §§ 38.250-258 8. Federal Register at 34.General:In addition to the VCC commodity characteristics identified in this proposed guidance, are there other characteristics informing the integrity of carbon credits that are relevant to the listing of VCC derivative contracts? Are there VCC commodity characteristics identified in this proposed guidance that are not relevant to the listing of VCC derivative contracts, and if so, why not?Are there standards for VCCs recognized by private sector or multilateral initiatives that a DCM should incorporate into the terms and conditions of a VCC derivative contract, to ensure the underlying VCCs meet or exceed certain attributes expected for a high-integrity carbon credit?In addition to the criteria and factors discussed in this proposed guidance, are there particular criteria or factors that a DCM should consider in connection with monitoring the continual appropri

to understand how observed volatility and inherent risk in the nascent and evolving carbon credit market could impact the price of the derivative.” Section 2(a)(1)(A) of the CEA; 7 U.S.C. § 2(a)(1)(A). Specifically, the CFTC has exclusive jurisdiction over “accounts, agreements (including transactions of the character of or commonly known to the trade as an ‘option’, ‘privilege’, ‘indemnity’, ‘bid’, ‘offer’, ‘put’, ‘call’, ‘advance guaranty’, or ‘decline guaranty’), and transactions involving swaps or contracts of sale of a commodity for future delivery” that are traded or executed on a designated contract market or swap execution facility or other board of trade, exchange, or market. For example, Core Principle 4 imposes on a futures exchange, or designated contract market (DCM), the responsibility for preventing manipulation, price distortion, and disruptions of the delivery or cash settlement process through market surveillance, compliance, and enforcement practices and procedures. 7 U.S.C. § 7(d)(4). The CFTC also supports the issuance of the guidance by citing to Core Principle 3 (providing that a DCM shall only list contracts that are not readily susceptible to manipulation), Core Principle 5 (requiring a DCM to adopt for each contract position limits or position accountability levels for speculators), and Core Principle 12 (requiring a DCM to have rules to protect markets and market participants from abusive practices and to promote fair and equitable trading on the exchange). 7 U.S.C. §§ 7(d)(3), (5), (12). The CFTC notes that the proposed guidance could be leveraged by swap execution facilities that offer swaps that settle to the price of a voluntary carbon credit or that are physically settled.Statement of Commissioner Christy Goldsmith Romero on Exchange Listing Standards for Voluntary Carbon Credit Derivative Contracts (Dec. 4, 2023). Commissioner Goldsmith Romero expressed a desire to know whether market participants believe that the CFTC adapted the appropriate portions

The CME Group’s new provisions are scheduled to be effective February 3, 2020, absent objection by the Commodity Futures Trading Commission.Legal Weeds: Under applicable law, designated contract markets like CME Group exchanges must establish and enforce disciplinary procedures that authorize them to “discipline, suspend or expel members or market participants” that violate the exchanges rules. (Click here to access 7 U.S.C. § 7(d)(13).) Separately, DCMs must have the capacity to detect, investigate and apply appropriate sanctions “to any person” that violates any DCM rule, and to obtain necessary information to ensure compliance with their rules.

See 7 U.S.C. § 1a(18). CEA Section 2(e) makes it unlawful for any person other than an ECP to enter into a swap, unless the swap is entered into on, or subject to the requirements of, a board of trade designated as a contract market under 7 U.S.C. § 7. See 7 U.S.C. § 2(e).

In light of recent events, DCOs also should prepare for the potential that certain contracts may experience significant price volatility, including negative pricing.See CFTC Staff Letter No. 20-17 (May 13, 2020), available at: https://www.cftc.gov/csl/20-17/download.See CFTC Regulation 38.252.Id.See CFTC Regulations 38.255, 38.258; App. B of Pt. 38.See DCM Core Principle 6, 7 U.S.C. 7(d)(5).See CFTC Regulation 40.6(a)(6).

19 7 U.S.C. §6c(a)(5).20 7 U.S.C. §9.21 7 U.S.C. §6c(a)(7).22 7 U.S.C. §9.23 7 U.S.C. §§13c, 2(a)(1)(B). 24 7 U.S.C. 7 U.S.C. §§13a-1, 13b. If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, orGeoffrey F. AronowPartner +1 202 736 8023garonow@sidley.comThomas K. CauleyPartner +1 312 853 7076tcauley@sidley.