Eugene Grygo, CCO, FTF News
Earlier this week, the CFTC via its Division of Market Oversight (DMO) and Division of Clearing and Risk (DCR) released an advisory that sets up guidelines for CFTC-registered exchanges and clearinghouses registered that want to list virtual currency derivative products.
But, before we dive into the new details, it’s useful to review what the CFTC has already done in this area.
Three years ago, the regulator designated virtual currencies to be commodities subject to the legal reach of the Commodity Exchange Act (CEA).
Since the CEA designation, the CFTC has taken on:
- An unregistered bitcoin futures exchange;
- Enforcing the laws prohibiting wash trading and prearranged trades on a derivatives platform;
- A proposed guidance on “what is a derivative market and what is a spot market in the virtual currency context;”
- Warning people about valuations and volatility in spot virtual currency markets;
- And the exposure of a virtual currency Ponzi scheme.
This latest guidance is an attempt by the CFTC to walk a tightrope of “appropriate oversight, while encouraging innovation and growth in these products.” CFTC Chairman J. Christopher Giancarlo has been clear that he wants the regulator to be helpful to the industry when it should be.
The new advisory intends to help industry participants by offering clarity on “certain enhancements when listing a derivative contract based on virtual currency and clarifies the CFTC staffs’ priorities and expectations in its review of new virtual currency derivatives to be listed on a designated contract market or swap execution facility [SEF], or to be cleared by a derivatives clearing organization.”
The CFTC is hoping that the new guidance will help “exchanges and clearinghouses effectively and efficiently discharge their statutory and self-regulatory responsibilities” as they cope with the rapidly advancing crypto currency markets.
Some of the key areas of the advisory are:
- Enhanced market surveillance;
- Close coordination with CFTC staff;
- Large trader reporting;
- Outreach to member and market participants;
- Derivatives clearing organization risk management and governance;
- And CFTC oversight of the virtual currency futures markets.
While the guidance is well timed and industry participants note that the CFTC has been proactive on this front, there is the nagging question about the crypto currency craze that will have to be addressed: Are things moving too fast for all the regulators?
I would also ask: Does the crypto currency phenomenon need a global response from the world’s regulators, rather then each jurisdiction acting on its own? Despite the sad truth that regulators across the globe have done a lackluster job of working in tandem, is that what this situation really demands?
The reason I’m suggesting a global response is that crypto currencies and their instruments may need more than the current set of laws and regulatory infrastructures. It’s the Wild, Wild West out there and there are no centralized monetary authorities to keep things from going off the rails.
Others too are suggesting that there is more to come. For instance, CFTC Commissioner Rostin Behnam has hinted as much in his remarks about the new guidelines.
“While this staff advisory clarifies expectations, it does not equate a change to the regulatory process. Such changes require a more fulsome and formal process, subject to Commission deliberation and public notice and comment,” Behnam says. “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.”
So, this much-needed guidance may only be a stopgap measure before bigger steps are taken.
You can explore more about the CFTC and virtual currencies here.
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