CFTC Announces Bitcoin Derivatives Self-Certification Process and New Bitcoin Contracts on Three Futures Exchanges | Practical Law

CFTC Announces Bitcoin Derivatives Self-Certification Process and New Bitcoin Contracts on Three Futures Exchanges | Practical Law

The CFTC published a fact sheet outlining the self-certification process for bitcoin-based derivatives products. Three exchanges self-certified new bitcoin derivatives contracts reportedly in accordance with these new CFTC self-certification procedures.

CFTC Announces Bitcoin Derivatives Self-Certification Process and New Bitcoin Contracts on Three Futures Exchanges

by Practical Law Finance
Published on 05 Dec 2017 • USA (National/Federal)
The CFTC published a fact sheet outlining the self-certification process for bitcoin-based derivatives products. Three exchanges self-certified new bitcoin derivatives contracts reportedly in accordance with these new CFTC self-certification procedures.
On December 1, 2017, the CFTC published a fact sheet which outlines:
  • The self-certification process of the CFTC for bitcoin-based derivatives products.
  • The oversight role that the CFTC plays regarding virtual currencies.
  • A list of 23 core principles that a designated contract market (DCM) must use when it self-certifies to determine that a new bitcoin derivatives contract it is offering complies with Commodity Exchange Act (CEA) and CFTC regulations.
The CFTC also reported on December 1, 2017 that three exchanges self-certified new bitcoin derivatives contracts, reportedly in accordance with these new CFTC self-certification procedures. The Chicago Mercantile Exchange Inc. (CME) and the CBOE Futures Exchange (CFE) self-certified new contracts for bitcoin futures products, and the Cantor Exchange (Cantor) self-certified a new contract for bitcoin binary options. Trading in bitcoin futures will be available:
  • On December 10, 2017 on CFE.
  • On December 18, 2017 on CME.
In a press release, CFTC Chairman Giancarlo explained that since the CFTC has limited statutory ability to oversee the cash markets for bitcoin, CME, CFE and Cantor have worked extensively with the CFTC to set appropriate standards of oversight over the bitcoin contracts to ensure protection of customers and orderly markets. These standards include:
  • Enhancements to:
    • contract design and settlement.
    • margining for CME.
  • More information sharing with the underlying cash bitcoin exchanges to assist CME, CFE, Cantor, and the CFTC in surveillance.
The CFTC will coordinate surveillance activities with CME, CFE, and Cantor to the extent possible and engage in a variety of risk-monitoring activities including:
  • Monitoring and analyzing:
    • the size and development of the market;
    • positions and changes in positions over time;
    • open interest;
    • initial margin (IM) requirements;
    • variation margin (VM) payments; and
    • stress-testing positions.
  • Conducting reviews of DCMs, derivatives clearing organizations (DCOs), other clearing firms, and individual traders involved in trading and clearing bitcoin futures.
  • Assessing whether further changes to the contract design and settlement processes are needed as trading on virtual-currency DCMs evolve. The CFTC will work with the DCMs to effect any necessary changes.
Despite these risk-monitoring activities, the CFTC provides a disclaimer to market participants to inform them of the limited statutory authority that the CFTC has over bitcoin markets. While the CFTC hopes that futures exchanges will monitor trading activity for potential impact on the price discovery process for these contracts, the CFTC warns investors to be aware of the potential high level of volatility and unique risk involved in trading bitcoin contracts.

NFA Investor Advisory

The National Futures Association (NFA) concurrently released its own investor advisory, warning investors that trading futures on virtual currencies "involves a high level of risk and may not be suitable for all investors."
The NFA cautions investors considering trading virtual-currency futures to properly protect themselves by:
  • Learning more about virtual currencies.
  • Understanding the risks involved and conducting due diligence on any individuals and firms soliciting for an investment in futures on virtual currencies, including bitcoin, by checking such parties':
    • CFTC registration status;
    • NFA membership status; and
    • background using NFA's BASIC system or calling NFA's Information Center.
  • Remaining cautious and closely monitoring bitcoin investments.
  • Being aware of sales pitches offering investment schemes that promise significant returns with little risk or that encourage you to "act now."
  • Understanding that the leveraged nature of the futures investment can produce large losses in relation to your initial investment.
  • Being aware of the risk of Ponzi scheme operators and fraudsters seeking to capitalize on the current attention focused on virtual currencies such as bitcoin.