US CFTC Publishes Advisory for Cryptocurrency Derivatives

The US markets regulator seeks to provide guidance to exchanges and clearinghouses.

by Marin Marinov
23 May • 3 min
In Regulation

The US Commodity Futures Trading Commission (CFTC) has published guidelines for listing of cryptocurrency derivative products in a report drafted for exchanges and clearinghouses that seeks to address “new risks imposed by virtual currency products”. The trading industry has long awaited regulatory clarity concerning the vetting process of new contracts.

The advisory was issued by the Division of Market Oversight (DMO) and Division of Clearing and Risk (DCR):

"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,” DMO Director Amir Zaidi said.

The guidelines

The document outlines several key requirements on exchanges and clearing houses in order to list a new cryptocurrency derivatives contract:

- enhanced market surveillance;

- close coordination with CFTC staff;

- large trader reporting;

- outreach to member and market participants;

- derivatives clearing organization risk management and governance;

- CFTC oversight of the cryptocurrency futures markets.

“In addition, the guidance is designed to help ensure that market participants follow appropriate governance processes with respect to the launch of these products,” Brian Bussey, Director of DCR said.

The CFTC advisory comes hours after a joint North American regulators operation called “Cryptosweep” that pushed down cryptocurrencies prices.

CFTC and Bitcoin derivatives

Under US laws, exchanges can launch futures by using the so-called self-certification process, or listing new products without prior approval from the regulator. Last year, Chicago-based derivatives exchanges CBOE and CME used this process to speed up the launch of their Bitcoin (BTC) futures products. Both exchanges consulted with the CFTC before self-certifying the products but US Futures Industry Association (FIA) expressed concerns:

“We believe that this expedited self-certification process for these novel products does not align with the potential risks that underlie their trading and should be reviewed,” FIA chief executive officer and president Walt Lukken wrote in an open letter to CFTC.

In January, CFTC organized a public discussion about the self-certification and cryptocurrency-based futures processes.

“For those who want regulators to remove all financial risk from the markets, I have news for you. That cannot and will not happen. Every element of the financial system has and always will have risk,” CFTC Commissioner Brian Quintenz said after the meeting.

“Self-certification is where a new contract's regulatory life begins, not where it ends. After a contract's self-certification and its initial listing, the CFTC will then surveil that product's trading and clearing activity on a daily basis, review every new rule issued by exchanges and clearinghouses affecting that product, and regularly perform market-wide and clearinghouse-level stress tests incorporating that product's margin sufficiency,” Quintenz added.