The CFTC and Supply Chain Resilience for Critical Minerals

This week the US CFTC’s Energy and Environmental Markets Advisory Committee (EEMAC), one of the five active advisory committees overseen by the CFTC, discussed rare earth metals, their importance to the energy transition and the expected evolution of both spot and derivative markets in these metals in the future. The opening statements from Commissioners Mersinger (the EEMAC chair), Johnson and Goldsmith Romero may be read here, here and here. Takeaways from these statements include:

• When critical commodities are found in abundance, spot commodity markets develop quickly and derivatives markets follow if the conditions are right. As rare earth exploration efforts increase and spot markets develop, derivative markets can be expected to follow;
• There is currently a “gold rush” for rare earths - as commodity derivatives regulators the CFTC must always be prepared for new commodity derivatives markets, particularly ones which will significantly impact the economy;
• The rapid growth of new derivatives contracts in cobalt and lithium suggests that some miners and manufacturers are already actively hedging risk in these markets;
• There are currently no rare earth minerals derivatives contracts listed in the US. The Biden administration’s “100-day supply chain report” (click here) discussed challenges to transparency in these markets, noting that “individual strategic and critical materials markets are often small, with incomplete information on trade flows, production, prices, or inventories.”;
• Because the number of market participants tends to be very small, there is an asymmetry of information in such markets. If rare earth minerals derivatives markets do launch to meet demand, the CFTC should monitor those markets to ensure that they are fair, competitive, and prices are set by market fundamentals rather than excessive market power or manipulative trading.

 RegTrail Insights

While it is abundantly clear that the rare earth metals topic is a nascent one for the CFTC, they have now established some focus on it which will likely continue to grow in prominence as the US and other western nations attempt to catch-up with China who currently dominate the rare earth metals supply chain globally.