FTX and intermediation a hot topic in regulatory discussions at Expo 

Regulatory approach to retail and sustainability also discussed

14 November 2022


Policymakers and industry experts discussed the latest approaches to regulating emerging areas of derivatives markets at FIA Expo 2022 in Chicago on Monday, including areas like crypto assets, retail products and climate-related issues. 

The "Regulatory Battlegrounds" panel at Expo 2022 featured moderator Daniel Davis, a partner at Katten Muchin Rosenman (left); Trabue Bland, SVP of futures exchanges at Intercontinental Exchange; Commissioner Christy Goldsmith Romero, Commodity Futures Trading Commission; Thomas Sexton, president and CEO, National Futures Association; and Kari Larsen, a partner at Willkie, Farr & Gallagher.

The hot topic across much of the first day of the conference was the recent implosion of FTX. And perhaps unsurprisingly, speakers on the "Regulatory Battlegrounds" panel weighed in on what they considered might come next from a policy perspective. 

Kari Larsen, a partner at law firm Willkie, Farr & Gallagher, noted that the FTX failure will have "an immense impact on the evolution of regulation in digital assets, because of the constant presence of FTX within the regulated markets space." 

"They were talking to the SEC as well as the CFTC, and talking to legislators actively. They were very face-forward," Larsen said. "There's no way that's not going to impact the legislation that is likely to come next." 

She also noted that "there's going to be a real balance in moving fast and having a reaction to this event, and possibly being more thoughtful and taking a bit longer." 

Trabue Bland, senior vice president of futures exchanges at Intercontinental Exchange, added that regulators are likely to focus on the important issue of customer protection in the wake of the FTX collapse. 

"It's hard to say that FTX doesn't set back the digital asset and blockchain efforts," Bland said. He stressed regulators will likely consider foundational issues like risk management, market integrity and customer protection in any approach to these markets. 

Offering the perspective of a regulator was Christy Goldsmith Romero, a commissioner at the US Commodity Futures Trading Commission. She noted the importance of taking a holistic approach to any innovations or new entrants to derivatives markets – whether that concerns digital assets or anything else. 

"Anyone, any company, developed in an unregulated space and coming into a regulated space needs to change to look like a regulated entity," she said. "They should expect the entire regulatory regime of the CFTC to apply." 

She further noted that the CFTC "has a regulatory regime that works" and that adding complexity and exceptions could create challenges or risks.  

"I am not in favor of bespoke regulation that breaks out of the CFTC regulatory regime and ultimately increases financial stability risk," Goldsmith Romero said. 

Climate and commodities 

The panelists also discussed climate-related innovations in derivatives markets and the related regulatory issues at play. 

Thomas Sexton, president and CEO of National Futures Association, noted that the self-regulatory body has been working closely with the CFTC to support the agency's efforts to think about how to respond to sustainable finance and climate-related issues. 

Sexton noted climate risks manifest largely in two forms: operational risks and market financial risks. On the operations side, he noted that "NFA's member firms account for it as part of their operational risk. Particularly today, it would be hard not to" after events like the pandemic or Hurricane Sandy that caused disruptions for the industry.  On the market financial risk side, he noted that existing risk management programs at NFA member firms are well-suited to address volatility and uncertainty in this area, as in others. 

ICE's Trabue Bland noted that his exchange is at the forefront of climate-related derivatives products. He said ICE supports the largest carbon markets in the world, including the European Emissions Trading Scheme, and is "working with a lot of governments around the world as they're working on their own standards for a cap-and-trade platform." 

Bland stressed that the scale and experience of ICE allows it to build markets in a durable way. 

"In Silicon Valley, it seems everyone is trying to create their own carbon platform," he said. "Those generally don't work because they end up building mini markets. The markets we build at ICE are much safer and have an efficient price-discovery function. We solve this problem using our markets and our clearing houses and the proven technology we've built." 

The panelists noted the interplay between long-term sustainability concerns and the short-term pressures of an energy crisis in Europe brought on by the Russian invasion of Ukraine. Goldsmith Romero noted this dynamic can be challenging, but it's the role of regulators like the CFTC to "make sure our markets are functioning well." 

"Ultimately, our job is to make sure the market is reflecting market fundamentals of supply and demand in key commodities like oil, natural gas and wheat," she said. 

The rise of retail 

NFA's Sexton noted that amid recent discussions about retail participation in the futures industry, regulators should remember how the industry has evolved and improved over the decades.

"Going back many years, we had some issues with NFA member firms or unregistered individuals preying on retail participants. That's definitely not where we are today," Sexton said. " In partnership with the CFTC and FIA and others, NFA has adopted rules to effectively curtail those abuses." 

Education is important for a new cohort of retail investors in our markets, but it should be acknowledged the regulatory structure to protect them is robust and works well, he added.

Larsen noted that one area that might affect the trend towards retail-related growth and innovation is regulators taking a harder look at technology and related innovations in the wake of the FTX collapse. 

She noted FTX's "technological solution to margin" and its non-intermediated model that was proposed is now off the table. But she added, "I don't think we can assume Ledger X and FTX will be the only exchange to go forward" with this kind of idea in the future, either as a way to cater to retail investors or anyone else. 

"There will be a lot of discussion on the importance of intermediaries in these markets," she said.  

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