Today is World Water Day, observed every year on March 22 to draw attention to the role that fresh water plays in our world and lives, and the challenges that lie ahead in realizing the right to water for all. As this year’s World Water Day seeks to draw attention to “Groundwater: Making the Invisible Visible,” IATP joins our partners Food and Water Watch, Americans for Financial Reform, National Family Farm Coalition, Public Citizen and other allied organizations today in welcoming the Future of Water Act of 2022 in the United States.
This legislation responds to a troubling initiative in the U.S. In December 2020, the Chicago Mercantile Exchange launched the world's first water futures contract. As an IATP article exploring this contract debut pointed out, this contract, overseen by the U.S. Commodity Futures Trading Commission (CFTC), could enable “investors with no direct or even indirect commercial interest in water prices” to “likely to become dominant investors in water futures contracts.” Such excessive speculation in water futures trading can also disrupt current water rights and use contracts governing water sale prices.
In addition, these water future contracts need to be considered in the context of the CFTC report on managing climate-related financial risk. The report proposed that “commodity derivatives exchanges could address climate and sustainability issues by incorporating sustainability elements into existing contracts and by developing new derivatives contracts to hedge climate-related risks.” Is a water futures contract one of these “new derivatives contracts”?
According to one of the CFTC’s core principles, derivatives contracts should not be traded if the underlying cash market for the commodity is susceptible to market manipulation. By allowing a water future contract to be traded — when the underlying cash market for that contract is price index opaque to the public and therefore susceptible to manipulation — the CFTC has violated one of its core principles. In sum, the Future of Water Act amends the Commodity Exchange Act to ban any water cash market tool, such as a price index, from serving as the underlying asset of a derivatives contract supervised and regulated by the CFTC.
IATP welcomes The Future of Water Acts amendment to the Commodity Exchange Act to exclude water as a tradable derivatives asset class under CFTC regulations. The Future of Water Act will help protect water as a public good by preventing its price manipulation in the futures market.
The Future of Water Act of 2022 is being introduced by Sen. Elizabeth Warren, along with Rep. Ro Khanna. The legislation would do two things:
- It would amend the Commodity Exchange Act to exclude "water or water rights (or any index, measure, value, or data related to water or water rights)" from the definition of a commodity.
- It would amend the Commodity Exchange Act to include "water or water rights (or any index, measure, value, or data related to water or water rights)" on the list of futures dealings that are prohibited.
But even as we support the bill, we must recognize that this specific problem of water futures was a response to recent challenges that arose because of a preexisting water market in California, partly due to the prior appropriation doctrine that governs water law in California. IATP previously explored this problem in 2013. The transformation towards sustainable water management practices and realization of right to water requires a fundamental rethink of the water governance framework. Some of the proposals for sustainable water management under consideration in California could complement ambitious federal actions like the Future of Water Act.
