Statement of Commissioner Christy Goldsmith Romero Before the Market Risk Advisory Committee
Continued Risk in Commodity and Derivatives Markets One Year Into Russia’s War on Ukraine
March 08, 2023
Thank you to the members of the Market Risk Advisory Committee (“MRAC”) for your service. I want to recognize Commissioner Kristin Johnson for her leadership of MRAC and also recognize the staff for their work in bringing us together today. The MRAC was created as the Commission was implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act, which fundamentally reformed the derivatives market structure. It had transferred risks into clearinghouses, moved trading into new swaps platforms, and for the first time, imposed risk management, capital, and margin requirements on the largest dealers. Markets were changing, and the risks in those markets were changing with them.
I am very glad that you have agreed to serve on this advisory committee because global markets are in a time with significant market risks arising from geopolitical events, economic uncertainties, and continued impacts from the pandemic. The MRAC’s objectives and scope are to advise the Commission on: (1) systemic issues that impact the stability of derivatives markets and other financial markets; and (2) the impact and implications of the evolving market structure of the derivatives markets and other financial markets.
The Commission can really benefit from your advice about market risk given that the last three years have placed systemic stresses on the stability of markets. The pandemic (which started three years ago next week), its supply chain disruptions and a tightened labor market that continues post-pandemic, a difficult interest rate environment, and the past full year of Russia’s war against Ukraine have brought unprecedented systemic issues to global financial markets that impact risk. I seek your advice on how the Commission should think about risk in these unprecedented times, and how we can promote market resilience to risk.
- The one-year milestone of Russia’s war against Ukraine provides a sober reminder of the substantial risk in the derivatives and commodities markets that arises from geopolitical events.
When Russia invaded Ukraine on February 24th, approximately one year ago, it sent a shockwave through the U.S. economy—indeed, the global economy—with direct impacts to commodity and derivatives markets. The effects were felt from blockades and the destruction or diversion of productive capacity in Ukraine and other affected countries. Ukraine’s wheat was essentially cut off from the world. Russian sanctions diverted other key commodities to Asia, especially to China and India, and related sanctions affecting countries like Belarus resulted in significant increases in fertilizer prices globally. That, in turn, triggered worries about diminished yields in agricultural commodities.
At the same time, trade disruptions limited key exports to Western economies, including natural gas, crude oil, coal, and industrial metals. The withdrawal of energy companies from Russia may have impacted short-term energy production, shifting burdens to producers in other countries, like the U.S., to fill in the void.
These consequences of Russia’s invasion gave rise to fears that abruptly sent commodity prices and volatility soaring. They worsened existing pressures on some commodities in the aftermath of the pandemic and its disruptions to supply chains in the midst of a “rapid rebound in global demand.” Where alternative sources for key commodities were available, price signals could not spur new production fast enough to mute shocks from Russia’s invasion. Families in America and around the world suffered.
Russia’s war triggered a historic, U.S.-led, international response, and Western economies pivoted to provide relief from the worst economic consequences of the war. From a price perspective, many commodities are broadly down from their initial highs following the Ukraine invasion, providing a much-needed reprieve for consumers. The commodities markets have proven resilient, but that type of stress can take a toll. They have adapted to the initial turmoil, blunting some of the worst fears that seemed likely to come to fruition just one year ago.
Given that Russia’s war against Ukraine continues, I would be very interested in MRAC committee members’ views about market risk one year into the war. MRAC members include representatives of the largest global banks. How are your financial institutions thinking about risk related to Russia’s war that could impact our markets? This week I spoke at the Institute of International Bankers (“IIB”) Annual Washington Conference, where chief executive officers (“CEOs”) of global banks were asked what kept them up at night, and the answer for one CEO was risk from geopolitical events because of uncertainty. Are there things that the Commission should be considering related to that uncertainty? How should the markets adapt in response so that they become more resilient to future risk?
I also seek your advice on how the Commission should think about risk in terms of the high prices, high volatility, and high volume that our markets have experienced this past year. Our role as regulators is not solely to monitor markets—we must also be proactive to identify and understand risk. Our job is to investigate; to study; to root out vulnerabilities in the markets and fix them so that American families don’t have to pay a price. Many of you are at organizations that have spent much time and resources identifying, understanding and managing risk from geopolitical events surrounding Russia’s war, and I value your considered viewpoints.
- Risks from economic uncertainty.
On my agricultural tours, I heard a lot from end users about economic uncertainty, including interest rates and concerns about the possibility of a recession. On Monday, Chairman of the Federal Deposit Insurance Corporation (“FDIC”), Martin Gruenberg, spoke to IIB about outstanding risks to the banking system saying, “First and foremost is the uncertainty about the macroeconomic outlook. There seem to be important trends at work that push the economy in different directions. Maybe that is why there seems to be even less agreement among economists than usual about when the next recession will occur and how severe it will be.” He listed four areas: “Recession uncertainty, inflation, higher and changing interest rates, and structural changes in the economy associated with the increase in remote and hybrid work collectively create a lot of uncertainty for banks.” On interest rates, Chairman Gruenberg said, “The bottom line is that planning a bank’s funding and investments in a way that is both prudent and profitable is a complex and challenging task at this time, especially when interest rates change to the extent they have over the past year. The management of interest rate risk is important to all banks and is an area of ongoing supervisory focus at the FDIC.”
These are complex, challenging issues about uncertainty and risk—issues that have systemic consequences. They matter to our markets and our market participants. I am interested in how the members consider the risks identified by Chairman Gruenberg for derivatives markets. What does it mean for future liquidity needs in derivatives markets should these risks impact the ability of banks to provide that liquidity? Can derivatives markets adequately manage these risks when they are already facing headwinds from the multiple systemic stress events that I discussed earlier?
These are the critical systemic issues facing derivatives markets. They matter to the U.S. economy and American families. I am grateful for your service to the MRAC and your advice on these critical areas of market risk.
 See U.S. Commodity Futures Trading Commission, Market Risk Advisory Committee Charter (last accessed Mar. 6, 2023), https://www.cftc.gov/About/AdvisoryCommittees/MRAC.
 See, e.g., C. Cowley, D. Rodziewicz, and T. Cook, Turmoil in Commodity Markets Following Russia’s Invasion of Ukraine, Federal Reserve Bank of Kansas City (May 23, 2022), Turmoil in Commodity Markets Following Russia’s Invasion of Ukraine - Federal Reserve Bank of Kansas City (kansascityfed.org). See also A. Mohseni-Cheraghlou, Beyond oil, natural gas, and wheat: The commodity shock of Russia-Ukraine crisis, Atlantic Council (Mar. 9, 2022), Beyond oil, natural gas, and wheat: The commodity shock of Russia-Ukraine crisis - Atlantic Council.
 See, e.g., Refinitiv Commodities Research, Commodity performance since the Ukraine invasion, Refinitiv Perspectives (June 8, 2022), Commodity performance since the invasion of Ukraine | Refinitiv Perspectives (noting, for example, that in addition to agricultural labor shortages, “[a]round one-third of Ukrainian agricultural land has been destroyed or is unavailable due to physical inaccessibility, mining, and/or field contamination,” according to a Ukrainian ministry). See also, e.g., J. Baffes, P. Nagle, Commodity prices surge due to the war in Ukraine, World Bank Blogs (May 5, 2022), https://blogs.worldbank.org/developmenttalk/commodity-prices-surge-due-war-ukraine.
 See, e.g., M. Saefong, The real impact of Russia’s invasion of Ukraine on commodities, Marketwatch—Commodities Corner (Feb. 24, 2023), The real impact of Russia's invasion of Ukraine on commodities - MarketWatch (stating that Russian sanctions have resulted in impacted “commodities . . . largely ending up in ‘redirected global trade flows via imports of Russian material by countries such as China, India and Turkey’”). See also, e.g., J. Baffes, P. Nagle, Commodity prices surge due to the war in Ukraine, World Bank Blogs (May 5, 2022), https://blogs.worldbank.org/developmenttalk/commodity-prices-surge-due-war-ukraine.
 See, e.g., J. Baffes, P. Nagle, How to mitigate the impact of the war in Ukraine on commodity markets, Brookings Institution (July 1, 2022), https://www.brookings.edu/blog/future-development/2022/07/01/how-to-mitigate-the-impact-of-the-war-in-ukraine-on-commodity-markets/. See also, e.g., International Agricultural Trade Report, U.S. Department of Agriculture, Foreign Agricultural Service, The Ukraine Conflict and Other Factors Contributing to High Commodity Prices and Food Insecurity (Apr. 6, 2022), The Ukraine Conflict and Other Factors Contributing to High Commodity Prices and Food Insecurity | USDA Foreign Agricultural Service.
 See A. Hirtenstein, How Russia’s Invasion of Ukraine Changed Financial Markets, Wall Street Journal (Feb. 25, 2023), How Russia’s Invasion of Ukraine Changed Financial Markets - WSJ.
 See, e.g., C. Russell, Column: War in Ukraine shows commodity markets are robust, adaptable, Reuters (Feb. 23, 2023), Column: War in Ukraine shows commodity markets are robust, adaptable | Reuters.
 This is why I have repeatedly called for deep-dive studies in key commodities experiencing stresses, like wheat, natural gas, and oil. The CFTC has data and expertise uniquely available to it, and it should use them. Deep-dive studies show the American people that there is a cop on the beat, focused on issues that matter to working families. They show that there is due scrutiny of some of the most critical commodities markets in the world. They provide the public confidence that the markets have integrity and are not driven by factors unrelated to the legitimate forces of supply and demand. See, e.g., CFTC Commissioner Christy Goldsmith Romero, Opening Statement before the Energy and Environmental Markets Advisory Committee (Sept. 20, 2023) (“The CFTC has an impressive surveillance program and an equally impressive cadre of commodity markets experts to rely upon as it seeks to understand these pressures of working families, farmers, and producers. We should use them more, and more publicly. That is why, in an internal meeting several weeks ago, I recommended that the CFTC conduct deep-dive studies to look at trading in a number of key commodities that have been experiencing significant volatility or price increases and publicly release our findings. I reiterate my recommendation today, publicly. I propose that the Commission conduct a series of deep-dive studies in key commodities markets, starting with those that have been experiencing the most recent stress—natural gas, crude oil, and wheat. The CFTC has a significant amount of data and expertise at our disposal, and the objective of these reports would be supportive of our core mission: To study whether prices are being determined by market fundamentals.”). See also CFTC Commissioner Christy Goldsmith Romero, Keynote Address at the Chicago Bar Association’s Futures & Derivatives Law Seminar, Chicago (June 15, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/oparomero1.
 FDIC Chairman Martin Gruenberg, Remarks by FDIC Chairman Martin Gruenberg at the Institute of International Bankers (March 6, 2023) FDIC: Speeches & Testimony - 03/06/2023 - Remarks by FDIC Chairman Martin Gruenberg at the Institute of International Bankers.