On May 21st, the Commodity Futures Trading Commission issued a new document offering valuable guidance for registered market participants.
The head of the CFTC’s Division of Market Oversight, Amir Zaidi said in an accompanying press release,
“The CFTC staff is committed to providing regulatory clarity as much as possible. As the virtual currency market continues to evolve, CFTC staff will seek to provide additional guidance to help market participants keep pace with innovation while complying with CFTC regulations.”
The advisory’s text explains that Bitcoin and other cryptocurrencies have been defined by the CFTC as commodities since 2015 and warns that, “The significant risks associated with virtual currency markets justify close scrutiny by both CFTC staff and registered entities,” also emphasizing that, “virtual currency platforms present heightened concerns about potential impacts on CFTC-regulated markets, including potential market manipulation, because they lack the transparency and robust regulation as U.S. derivatives platforms.”
The document cites the market’s youth as a potential risk factor, also commenting on the frequency of dramatic price swings.
“This raises questions about whether clearinghouses can adequately assess the inherent risk of virtual currency contracts in setting margin levels for these contracts,” the advisory concludes.
Overview of the Advisory’s Key Areas:
- Enhanced Market Surveillance: Focus on transparency, Know Your Customer and Anti Money Laundering regulations, as well as real-time monitoring “of all trading activity on its electronic trading platforms to identify disorderly trading and any market or system anomalies.”
- Close Coordination with CFTC Surveillance Group: “Staff expects exchanges to regularly discuss with Commission staff a wide range of issues related to the surveillance of virtual currency derivatives contracts, and provide surveillance information as requested by Commission staff.”
- Large Trader Reporting: “Staff recommends that the exchange set the large trader reporting threshold for any virtual currency derivative contract at five bitcoin (or the equivalent for other virtual currencies). Staff believes that this level could help facilitate surveillance of the futures and options markets by increasing the exchange’s ability to focus on relevant information in the spot market.”
- Outreach to Members and Market participants: “Prior to listing a new contract on virtual currency, staff expects an exchange to solicit comments and views on issues relating to the listing, beyond those that relate to the contract’s terms and conditions and its susceptibility to manipulation.”
- Derivatives Clearing Organization Risk Management: “Staff will review the DCO’s proposed initial margin requirements to assess whether they are commensurate with the risks of the contracts, including risks that result from any unusual product characteristics. Staff will review, among other things, the ability of proposed margin requirements to adequately cover potential future exposures to clearing members based on an appropriate historic time period.”
- CFTC Oversight: Regarding the current self-certification for new contracts, the advisory states, “To bring greater transparency to the process, if Commission staff is unable to confirm that the contract being self-certified complies with the CEA and regulations, but the exchange lists (or intends to list) the contract, staff may notify the exchange of its concerns in writing.”
Understanding the CFTC Guidance
According to CFTC Commissioner Rostin Benham, the staff advisory is meant to clarify expectations, but it does not constitute a formal change to the regulatory process.
“Such changes require a more fulsome and formal process, subject to Commission deliberation and public notice and comment. I look forward to continuing to explore our options, which I hope will include some parameters for determining when self-certification may not be appropriate, and for determining when such matters are appropriately brought before the Commission,” the Commissioner said in a speech.
For the head of the regulatory entity’s Division of Clearing and Risk, Brian Bussey, “CFTC staff is providing this information, in part, to aid market participants in their efforts to design risk management programs that address the new risks imposed by virtual currency products.
In addition, the guidance is designed to help ensure that market participants follow appropriate governance processes with respect to the launch of these products.”
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