The Futures Industry Association (FIA) is connecting the dots between cleared derivatives markets and the effort to fight climate change via a new white paper, “How derivatives markets are helping the world fight climate change.”
The paper spotlights products and trading platforms that are facilitating a transition to a low-carbon future. It also points to potential public sector partnerships that could yield a more sustainable economy.
“FIA and its members know that climate change poses a serious risk to the global economy. To help manage these risks, the regulated derivatives markets have already developed innovative products and trading platforms to help the world transition to a low-carbon future,” explains Walt Lukken, FIA’s president and CEO, in a prepared statement.
The report notes that derivatives markets help to manage risk via futures, options and other derivatives that “enable multinational companies to absorb currency fluctuations, allow energy companies to mitigate short-term price volatility so they can invest in future infrastructure, and let farmers grow their crops without worrying that global trade disruptions might drive them to ruin,” according to the report.
“Even legacy contracts like thermal coal futures are important tools for the global response to climate change. These contracts — like all derivatives contracts —offer important signals on supply and demand through pricing trends. Furthermore, legacy contracts on so-called ‘dirty’ energy sources are vital to consumers who need to limit their exposures to price risk, now and in the future, which allows them to create long-term investment plans for a more sustainable future,” according to the report.
At the heart of the matter is the assertion that “recent climate-related innovations in derivatives markets are a natural extension of an industry that prides itself on serving,” declare the authors of the report.
“It should be no surprise, then, that derivatives markets are deeply engaged in the world’s response to climate change. The global cleared derivatives industry has steadily evolved over the last several years, creating new products and new venues to manage this risk, showcasing the value of market-based solutions,” according to the report.
“Specifically, derivatives markets play a vital role in discovering prices for everything from a barrel of crude oil to a megawatt of solar energy to a tonne of CO2, helping businesses and policymakers understand the true costs of climate change,” according to the report.
The FIA highlights three key areas of partnership and opportunity:
- Innovation “such as carbon trading platforms, help market participants discover prices for commodities that are vital to addressing climate change concerns. Exchanges, working in partnership with market participants, are quickly identifying new products that assist in sustainability efforts.”
- Standardization in the form of industry-developed best practices and standards “such as sustainable sourcing for metals in physically delivered commodity contracts,” underscores the need for “collaboration among market participants and leveraging industry expertise.”
- And Harmonization to end “a fragmented global regulatory environment,” so that the public and private sectors work together on laws and regulations that “avoid unnecessary conflicts and incentivize market-driven solutions.”
The next steps will involve “market-based solutions” that are important for the initial global response to climate change, and “policymakers to leverage the power of markets and private innovation in building a more sustainable global financial system and economy,” Lukken says.
The full report can be found here: https://bit.ly/2YUWsob
The FIA is a global trade association representing the futures, options and centrally cleared derivatives markets, including clearing firms, exchanges, clearinghouses, trading firms and commodities specialists from about 50 countries. The association also encompasses technology vendors, lawyers and other professionals serving the industry.