Energy and Commodities Outlook 2021

Read time: 5 minutes (974 words)

The independent federal agencies overseeing commodities and energy services markets have had a rather interesting year in the face of political transition. Reed Smith partners Jonathan Marcus and Colette Honorable discussed U.S. Commodity Futures Trading Commission (CFTC) and Federal Energy Regulatory Commission (FERC) action and regulatory developments affecting the commodities and energy markets.

Notable CFTC developments include: (1) the CFTC transition; (2) CFTC action on position limits; (3) investigations into the WTI negative price episode and gas markets during Winter Storm Uri; (4) the creation of the Climate Risk Unit (CRU); and (5) a quieter year for CFTC enforcement. Notable FERC developments include: (1) the FERC transition; (2) creation of new FERC offices and positions; (3) important appellate decisions; and (4) an active FERC enforcement year.

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CFTC transition: New commissioners would break stalemate

The Biden administration has nominated Acting Chairman Rostin Behnam to serve as chairman of the CFTC. A confirmation hearing was held before the Senate Agriculture Committee on October 27, 2021. The Biden administration has also nominated Democrats Kristen Johnson and Christy Goldsmith Romero to serve as CFTC commissioners, and the nominees are awaiting confirmation by the U.S. Senate. Johnson and Goldsmith Romero may not receive a confirmation hearing until the Biden administration nominates a Republican for the remaining vacancy. The CFTC currently has two commissioners, Acting Chairman Behnam and Commissioner Dawn Stump, a 1-1 split.

CFTC action on position limits

The CFTC implemented position limits on certain physical commodity futures and options contracts and economically equivalent swaps in an October 2020 final rule with a general compliance date of Jan. 1, 2022. However, limits on economically equivalent swaps and elimination of the risk management exemption will not take effect until Jan. 1, 2023. While there is speculation as to whether the anticipated Democratic-majority Commission would revisit the final rule to make it more restrictive, we view that as unlikely.

Investigations into WTI negative price episode and gas markets during Winter Storm Uri

In November 2020, the CFTC’s Division of Market Oversight (DMO) and Office of the Chief Economist reported on the negative prices experienced in the WTI Crude Oil May 2020 Futures Contract. They identified a number of factors that contributed to the unusual episode but did not reach a conclusion as to the cause of the event.

With respect to Winter Storm Uri, DMO and the CFTC’s Division of Clearing and Risk cited a variety of factors – including the isolation of the Texas energy market and the severity of the storm – that contributed to the extreme volatility in the natural gas spot market, in a June 2021 presentation to a CFTC advisory committee.

CFTC creates the Climate Risk Unit

Acting Chairman Behnam announced the establishment of a Climate Risk Unit (CRU) in March 2021. The CRU will focus on the role of derivatives in pricing and addressing climate-related risk and in transitioning to a low-carbon economy. Its goal is to ensure that new climate-related derivatives products and markets properly facilitate hedging, price discovery, and market transparency.

Quiet CFTC enforcement year

As to be expected in light of the transition year, 2021 has been a relatively quiet year for the CFTC Division of Enforcement. Significant cases involved price manipulation and misappropriation of confidential information in the energy markets. Based on resolutions of pending matters and new charges, the Enforcement Division will likely focus in the coming year on crypto operators and markets, defi platforms, swap data reporting, and swap dealer compliance and registration.

Key takeaways
  • The Biden administration nominated CFTC and FERC commissioners to fill vacant seats.
  • The CFTC and FERC are both investigating possible misconduct during Winter Storm Uri.
  • The CFTC and FERC have both created new units and offices in their agencies.
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