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CFTC Announces Heightened Review of Bitcoin Futures Products
Practical Law Legal Update w-012-7968 (Approx. 4 pages)
CFTC Announces Heightened Review of Bitcoin Futures Products
by Practical Law Finance
| Published on 25 Jan 2018 • USA (National/Federal) |
CFTC Chairman Christopher Giancarlo announced an enhanced focus of the agency on virtual-currency derivatives products, including recently launched bitcoin futures. The CFTC also added an eighth element to a checklist that it will follow when evaluating a planned launch of a virtual-currency derivatives product.
On January 19, 2018, CFTC Chairman Christopher Giancarlo announced, in a speech at the annual ABA Derivatives and Futures conference, plans to enhance CFTC focus on virtual-currency derivatives products such as recently launched bitcoin futures contracts (see Legal Update, CFTC Announces Bitcoin Derivatives Self-Certification Process and New Bitcoin Contracts on Three Futures Exchanges).
The CFTC also added an eighth element to a checklist that it will follow when evaluating a planned launch of a virtual-currency derivatives product. The CFTC looks for the following factors to help ensure that a virtual-currency derivatives product is sufficiently margined and not readily susceptible to manipulation:
- The designated contract market (DCM) offering the product has set exchange large-trader reporting thresholds at five bitcoins or less – a relatively low threshold that could enable the CFTC to have a clearer picture into major positions in the instrument.
- The DCM offering the product has entered into direct or indirect information sharing agreements with spot market platforms to allow access to trade and trader data.
- The DCM offering the product has agreed to engage in monitoring of price settlement data from cash markets and to identify anomalies and disproportionate price moves.
- The DCM offering the product has agreed to conduct inquiries, including at the trade-settlement and trader level when anomalies or disproportionate moves are identified.
- The DCM offering the product has agreed to regular communication with CFTC surveillance staff on trade activities, including providing trade-settlement and trader data upon request.
- The DCM offering the product has agreed to coordinate product launches to enable the CFTC's market surveillance branch to monitor minute-by-minute developments regarding the product.
- Any derivatives clearing organization (DCO) that has agreed to clear the product has set substantially high initial margin and variation margin requirements for cash-settled instruments.
- Any DCM or swap execution facility (SEF) offering the product has agreed to disclose to the CFTC the steps they have taken in their capacity as self-regulatory organizations to gather and accommodate appropriate input from concerned parties, including trading firms and futures commission merchants (FCMs).
The first six elements are intended to determine that any new virtual-currency derivatives product offering complies with DCM obligations under CEA core principles and CFTC regulations and related guidance. The seventh element is intended to ensure that virtual-currency derivatives product offerings have adequate collateral coverage to manage the volatile nature of bitcoin. The eighth element was added to the checklist in response to concerns raised in an open letter to the CFTC written by the FIA regarding the lack of public hearings prior to the self-certification of bitcoin futures.
The eighth element will provide an opportunity to clearing members to raise appropriate concerns for consideration by regulated platforms (DCMs and SEFs) proposing to offer virtual-currency derivatives and DCOs considering clearing new virtual-currency products. Chairman Giancarlo stated that the CFTC will take a close look at DCO governance around the clearing of new products and to consider recommendations for possible further action.