Comment Text:
Flett Exchange, LLC
15 Exchange Place, suite 710
Jersey City, NJ 07302
201-209-0234
www.flettexchange.com
December 16, 2010
Mr. David Stawick
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
RE: Solicitation for Comments on the Study on Oversight of Carbon Markets (proposed rule 75 FR 72816)
Dear Mr. Stawick,
As president of Flett Exchange I am pleased to offer my insight to the Interagency Working Group with the study on oversight of a carbon market. Flett Exchange operates the only transparent and competitive spot exchange for Solar Renewable Energy Certificates (SRECs). Our flagship contract is the New Jersey Solar Renewable Energy Certificate market in which our customers make up of approximately 30% of the solar energy producers. 80% of the electricity generators use our electronic marketplace to procure SRECs to satisfy the state mandated New Jersey Renewable Portfolio Standard. Flett Exchange is also an active broker of long-term bilateral SREC contracts between eligible commercial entities. My self and staff are all former members of the New York Mercantile Exchange. I am still an active member of the NYMEX (now owned by the CME). I bring over 20 years of brokering and trading experience from regulated commodities trading. Our business model is to bring transparency, price discovery, and liquidity to opaque, fragmented, and unstandardized environmental markets via our online REC exchange. Regulation under the Dodd-Frank Act will help ensure fair and orderly markets in Carbon while reducing the potential of systemic risk. It is with gratitude that we offer our insight to the Working Group.
Question 1: Section 750 of the Dodd-Frank indicated that the goals of regulatory oversight should be to ensure that carbon markets are efficient, secure, and transparent. What other regulatory objectives, if any, should guide the oversight of such markets?
Comment: We suggest that you include mandatory REC markets in your definition of Carbon Markets. Mandatory REC markets are designed to help finance various technologies with a goal of reducing carbon through means such as generating renewable energy or other alternative technologies to achieve energy efficiency. Mandatory State REC markets are being created quicker than regional Carbon markets in the U.S. For example; the New Jersey solar market represents almost 1 billion dollars invested in Solar with $160 million dollars in SREC value due to be generated this year. New Jersey State law mandates solar production to reach 5 Gigawatts by 2025. This will require approximately $20 billion invested in solar which may equate to $1 to $3 billion a year in traded NJ SRECs. Similar programs are operating in PA, MA, DE, OH, MD, and DC. If a tradable REC market is established in CA it will dwarf all of these states combined (voluntary REC markets should not be included or regulated).
Question 2: What basic economic features that might be incorporated in a carbon market that would have an effect on market oversight provisions?
Comment: The largest factor in oversight of a Carbon Market is to have a centralized tracking system for spot and derivative trades and positions. All positions and trades should be as close to real-time as possible. Tracking systems need to be neutral and allow for unlimited access by derivative exchanges and spot electronic marketplaces.
Question 3: Do the regulatory objectives differ with respect to oversight of spot market trading of carbon allowances compared to oversight of derivatives market trading in these instruments?
Comment: If clearing is available, all bilateral long-term contracts for Carbon and RECs should be required to be cleared. Solicitation of long-term contracts should be done only by NFA registered individuals or firms. The pure nature of a Carbon Credit and a REC is to enable the investment of a technology (solar, wind, combined heat and power, scrubbers, etc…) in which financing of these investments requires long-term Carbon or REC off-take agreements. Investors in this arena span all segments, homeowners, small and large business, governments, non-profits and single purpose entities without balance sheets. The diversity of the participants makes NFA and CFTC oversight imperative, especially to protect participants who are less sophisticated. Spot Markets are used by all of the above. Price transparency in the Spot Market is needed by the participants and the ability to track transactions by the CFTC is needed to have full “visibility” of the Carbon and REC markets. Spot trades should be done on transparent and competitive electronic platforms with reporting and oversight by the CFTC and NFA.
Question 4: Are additional statutory provisions necessary to achieve the desired regulatory objectives of the carbon markets beyond those provided in the Commodity Exchange Act, as amended by the Dodd-Frank Act, or other federal acts that may be applicable to the trading of carbon allowances?
Comment: The Federal Government does have the need to regulate State REC and Energy Efficiency spot markets because the spot markets directly interact with long term derivatives and futures. Spot market activity data is needed for effective oversight.
Question 6: What types of data or information should be required of market participants in order to allow adequate oversight of a carbon market. Should reporting requirements differ for separate types of market participants?
Comment: The design of Carbon and REC markets have a defined birth and maturity timeline. Market manipulation is more likely in the beginnings of market development with lower volumes and fewer participants; however it can happen at any given time. The more information available to regulators gives the ability to identify manipulation or reconstruct it for prosecution. The four key data points required are 1. forward positions and trades, 2. spot positions and trades, 3. asset ownership (for carbon credit or REC generation) or Carbon or REC liability, and 4. trader identification (ability to detect if single entities trade non-competitively with themselves to effect price movement).
Question 7: To what extent is it desirable or not desirable to have a unified regulatory oversight program that would oversee activity in both the secondary carbon market and in the derivatives markets?
Comment: The Derivative and Secondary (spot) market are the same. To monitor it effectively unified regulatory oversight is imperative.
Question 8: To what extent, if any, and how should a U.S. regulatory program interact with the regulatory programs of carbon markets in foreign jurisdictions?
Comment: U.S. carbon markets should act independently of carbon markets in foreign jurisdictions. Monitoring and enforcement should rest on the CFTC and NFA and any other U.S. agencies or groups.
Question 9: What has been the experience of state regulators in overseeing trading in the regional carbon markets and how would that instruct the design of a feral oversight program.
Comment: State Regulators are not equipped to oversee trading in regional carbon/REC markets. There is little to no knowledge of futures markets and the correlation to spot markets on the State level.
Question 11: Who are the primary participants in the current primary environmental markets? Who are the primary participants in the current secondary allowance and derivatives environmental markets?
Comment: The primary participants in the REC market are producers of RECs. On the Solar side in NJ it is thousands of homeowners and small business, and hundreds of large business, schools, municipalities and single purpose entities. The secondary market consists of two dozen electricity providers who need to procure RECs for RPS needs and aggregators. Flett Exchange operates the only transparent online platform for spot transactions to all of the above. The population of participants in the next decade in the Carbon and REC markets will span every single type of entity.
Thank you for the opportunity to provide input to the Interagency Working Group.
Sincerely,
Michael D. Flett
President, Flett Exchange, LLC
