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Commodity Futures Trading Commission EEMAC Meeting

Commodity Futures Trading Commission

Energy and Environmental Markets Advisory Committee Meeting

Friday, October 16, 2020

Presentations

Panel I: Environmental, Social, and Governance Initiatives in the Energy and Environmental Markets

Panelists:

  • Paula Glover, President and CEO, American Association of Blacks in Energy
  • Timothy Burke, Omaha Public Power District
  • Ray Dempsey, Chief Diversity Officer, BP America
  • Noha Sidhom, Executive Director, Energy Trading Institute
  • Lopa Parikh, Senior Director, Federal Regulatory Affairs, Edison Electric Institute
  • Malinda Prudencio, Vice President of Risk Control & Chief Risk Officer, The Energy Authority
  • William F. McCoy, Managing Director and Counsel, Morgan Stanley

Glover began the discussion by laying out steps to improving diversity and inclusion. Once you get diversity right, according to Glover, inclusion is easier to achieve. Glover stated that there needs to not only just be a focus on efforts to increase African American employment but also creating an environment to thrive for current employees, including, among other things, making sure diverse employees have a pathway to leadership. She stated that other steps to increase diversity, equity, and inclusion would be to commit to an equitable spend with African American owned businesses and directing resources to encourage students to be in the industry and supporting them once they are in the industry.

Burke presented four key elements that his institution considers to further diversity, equity, and inclusion. They are community, company clarity, connection, and capacity. With respect to community, Burke discussed various conferences that are held by Omaha Public Power that bring together leaders and others in the community to work on diversity issues and discuss ideas. With respect to company clarity, Burke stated that organizations need to be committed to diversity, equity, and inclusion and his institution has a strategic directive on employee relations. With respect to connection, Burke mentioned that inside his organization, they are organizing employee roundtables that include professionals of color, women, and even including white men as full diversity partners. Lastly, he stated that organizations need to build a capacity and capability for the future by creating an environment for employees to thrive.

Dempsey discussed the key steps BP took this summer to further diversity and inclusion. He stated that BP specifically, observed Juneteenth, made MLK an official BP holiday, and prohibited the confederate flag on all BP sites. He stated that the framework for action for BP has three pillars: (1) transparency; (2) accountability; and (3) talent. With respect to transparency, he mentioned that BP will publish a D&I report in 2021 along with other reports. On accountability, he mentioned that they will link the progress in D&I to performance management and compensation. Finally, with respect to talent, he confirmed that BP will increase the diversity of talent pools by refining the metrics and process for assessing talent.

Sidhom discussed key statistics that demonstrate how women and certain minorities are underrepresented in the energy workforce. Sidhom added that the energy industry as a whole is making progress through new initiatives to include women and minorities. In addition to inclusion initiatives, she stated that energy companies are also working on renewable energy initiatives which are reshaping the dialogue with consumers. Sidhom presented key figures from statistical studies that showed that companies benefit from making diversity a priority. She added that one specific area where D&I is smaller and could benefit from improvement is within the commodity and energy trading space. Sidhom’s own firm is aiming to hire at least 25% female traders. Additionally, her firm is aiming to raise 25% of funds from women and underrepresented communities. Sidhom urged regulators to urge the commodity trading market to create an environment that fulfills the progress of diversity and inclusion.

Parikh discussed how operations have changed dramatically over the last decade in domestic electric organizations. She outlined that over the last 8 and a half years the industry has invested in wind and solar resources much more, and have sought to change carbon dioxide emissions, noting that EEI member companies have reduced their emissions by 45% since 2005. With respect to ESG more generally, Parikh continued that EEI is working with members to deliver standardized ESG information to the community and investors. She mentioned that outreach has been conducted across the market and participants, and EEI has helped develop an ESG reporting template with precise information. Parikh stated that the template would convey consistent information across all EEI companies, would result in greater transparency and comparability, and would disclose information about long term sustainability outlook. In addition to ESG reporting, Parikh discussed various initiatives to increase diversity and leadership.

Prudencio discussed the public power industry’s advancements in ESG related categories. Prudencio stated that ESG initiatives are important for three reasons: (1) companies are better with a diversity of voices; (2) it would ensure they are responsibility sharing the voices of public power; and (3) it attracts and retains talent. With respect to the environment, Prudencio summarized client initiatives to cut down on energy consumption and negative emissions. On social, she stated that the public power industry is focused on how to treat employees, equitable pay, local give back, and supporting collegiate scholarships. Finally, regarding diversity and inclusion, Prudencio stated that far more innovative thought and better outcomes are a result of a more diverse team. Purdencio noted an increase in diversity in the public power industry over the last few years and specifically highlighted her firm’s leadership in promoting women to senior positions.

McCoy outlined that Morgan Stanley has partnered with partner organizations to tackle things like climate change and inequality, and ultimately plans to achieve carbon neutrality for global operations by 2022. McCoy specifically noted Morgan Stanley’s capital contributions to support global carbon solutions and their initiative to help develop global accounting standards to measure and reduce the global climate impact of financing. With respect to racial and social injustice, he outlined that Morgan Stanley has increased their efforts by focusing on employees, supplies, and the communities where they work and live. Morgan Stanley’s comprehensive D&I strategy includes consideration of accountability, representation, advancement, and culture. McCoy mentioned that his firm conducts annual diversity reviews to monitor representation and monitor impact of promotion and transition on the talent pipeline.

Q&A

Commissioner Berkovitz asked Sidhom to comment on the lack of diversity in commodity/energy trading and whether that may impact trading and risk taking. Sidhom noted that due to an industry wide transition to more quantitative trading models, there have been more opportunities for women and other underrepresented groups. Additionally, Sidhom stated that while it doesn’t necessarily impact the amount of risk taking, increasing diversity will make for a more dynamic decision-making process, ultimately bringing about benefits.

An associate member asked the panelists for their opinion on the most important thing to measure in moving toward a more diverse workplace. Dempsey responded that there are many layers of data to look at, adding that his firm looks at inputs around recruiting, applicant flow, performance rating outcomes of employees, indicators about who stays and who leaves, and finally employee satisfaction within the company.

Panel II: Exchange Listed Market Derivatives

Panelists:

  • Derek Sammann, Senior Managing Director, Global Head of Commodities & Options Products, CME Group
  • Steven Hamilton, Global Head of Financial Derivatives, ICE Futures U.S.
  • Megan Morgan, Global Head of Equities and Index Sales, Eurex Exchange

The second panel focused on a discussion of exchange-listed environmental, social, and governance (ESG) derivatives. Sammann began by reviewing new ESG derivatives and their product development. He discussed the rise in popularity of ESG-related investments and the increasing risk of environmental investments in a world threatened by climate change. He stated that as CME develops ESG futures and indexes, they focus on interactive design rather than a “if you build it, they will come” methodology.

He continued that one notable challenge is that the categorization of an asset as ESG is somewhat subjective, with different asset managers considering different factors in the determination of an asset as ESG. Sammann concluded that overall, CME is focusing on developing new ESG derivatives as we transition to a “greener economy.”

Hamilton joined to discuss ICE’s ESG futures, including increased demand for sustainable investments that shows no sign of slowing down. He stated that there is a new positive correlation between Fiduciary Duties, commitment to sustainability, and company performance. Hamilton stated that this is caused by increased client demand for companies that obey regulatory obligations. He continued that ESG investing is a process that requires access to relevant, transparent, and standardized tools for investors to truly understand their investments, perhaps more than in other markets. Like Sammann, he outlined his belief that the single biggest challenge in ESG is the lack of standardization in categorization and regulation. Hamilton concluded that this subjectivity causes inconsistent standards of investments but added that index providers and governments have been trying to increase transparency in their data and regulations.

Morgan discussed the need to remain 100% compliant with all ESG principles and regulations to maintain a successful investment portfolio. She stated that the three primary goals are liquidity, transparent pricing, and a recognizable benchmark for success in ESG investments. Morgan continued that Eurex has used these three goals in mind while consulting the overall movement of the market (primarily Scandinavian markets, as they are the “hub” of sustainable investments, but also France and Germany). She stated that asset managers in Europe are increasingly viewing environmental sustainability as a necessary part of new investments but are focusing on devising ways to keep ESG derivative investments as liquid as possible. Morgan said that if a firm wants to prioritize building liquidity in the ESG derivatives market, simplicity is key. She said that this means working with well-established benchmark providers, excluding controversial investments (e.g. tobacco, environmentally damaging industries) and streamlining the investment process where possible. Morgan concluded that the EU has begun to agree on a taxonomy for what counts as an ESG asset, but sustained growth can only occur once that agreement is throughout the entire globe and there exists a plethora of reliable and available ESG data.

Panel III: CFTC Staff Update on the Energy Derivatives Markets between Q1 and Q3 2020

Panelists:

  • Sayee Srinivasan, Deputy Director, Risk Surveillance Branch (RSB), Division of Clearing and Risk (DCR)
  • John Paul Rothenberg, Risk Analyst, RSB, DCR

Srinivasan began his remarks by going over the margin performance of key energy benchmark contracts. He added that a quantitative oversight of DCO’s margin models is the first line of defense in ensuring long-term profitability, followed by a daily risk analysis and periodic supervisory stress testing.

Rothenberg then contributed his perspective on the meaning of Initial Margin (IM), as well as the evolution of margin requirements in the energy industry. He stated that risk management is an incredibly important part of successful investments in energy and that the counterparty’s IM is designed to cover most of the risk in case of default, but this only works most of the time. Rothenberg added that the rest of the risk is typically covered by the defaulter’s guarantee fund before dipping into other sections of the investment. He continued that it is calculated at a portfolio/account level and works to cover the cost of unwind most of the time (including market moves, transaction costs, and market impact). Rothenberg concluded that some losses are not covered by the IM to avoid capital wastes, but these breaches typically only happen two to three times each year.

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