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US Congress questions industry on merits and risks of FTX's non-intermediated model 

FIA's Lukken testified before House Ag Committee  

12 May 2022

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US lawmakers questioned experts in the derivatives industry on May 12 about the recent proposal from FTX US Derivatives to clear margined products using a non-intermediated model.

The US House of Representatives Committee on Agriculture held a hearing on 12 May titled "Changing Market Roles: The FTX Proposal and Trends in New Clearinghouse Models." The hearing featured testimony from FIA President and CEO Walt Lukken as well as representatives of FTX, CME Group, Intercontinental Exchange, and CoinFund, an investment firm focused on crypto assets.

Legislators focused their questions on the FTX proposal's broader implications for traditional derivatives products and market participants. Although FTX has said that its initial focus will be on cryptocurrency futures and options, US legislators expressed concern about potential disruptions to price discovery and hedging if this model was extended to agriculture and energy markets.

The hearing was conducted by the US House of Representatives Committee on Agriculture, and was titled "Changing Market Roles: The FTX Proposal and Trends in New Clearinghouse Models." It featured testimony from FIA President and CEO Walt Lukken as well as representatives of FTX, CME Group, Intercontinental Exchange, and CoinFund, an investment firm focused on crypto assets.

In his statement before the committee, Lukken noted that the FTX proposal was "innovative" and possibly "transformative" but also potentially risky. As such, it requires lawmakers and regulators to carefully weigh the benefits of an alternative clearing structure against the risks of altering proven protections within existing market structure.

"FIA supports the efforts of FTX to further advance real-time risk management in clearing and bring greater competition to our markets. Their proposal has advanced a healthy debate in our industry," Lukken said. "However, we believe that further analysis and information are needed on the FTX proposal, and we look forward to the deliberative process of the CFTC that will help bring additional clarity and information to this unique clearing model."

FTX's proposal would allow customers to bypass Futures Commission Merchants, or FCMs, and become direct members of its clearinghouse. The proposal also calls for near-real time margining and automatic liquidation of positions that are under-margined. The US Commodity Futures Trading Commission published the proposal for comment with a May 11 deadline for responses; FIA submitted extensive comments to the CFTC on behalf of its members, including FCMs.

At the hearing, CME and ICE gave testimony expressing concern to legislators about the potential impacts of the proposal. Specifically, CME Group Chairman and CEO Terry Duffy warned the proposal was "glaringly deficient," noting it could set a precedent that would open the door for changes that could threaten the safety and soundness of US financial markets. Chris Edmonds, chief development officer at ICE, said the proposal "eliminates sound risk management practices" and raised concerns that CFTC approval of the FTX model could have negative implications for foreign recognition of US regulation as "equivalent."

Sam Bankman-Fried, the chief executive of FTX, defended the proposal and said it would provide "equitable access" to markets and market data. He also emphasized that it would bring oversight of digital asset derivatives onshore under U.S. regulators like the CFTC. Bankman-Fried also noted that while the exchange's proposal of an integrated approach is novel, the individual parts are all subject to clear oversight under existing regulatory structures. "There should be diversity for risk models as long as they are consistent with current rules and regulation at the CFTC, and I do not believe our proposal is inconsistent with those rules," he said. "I think we should encourage healthy competition and I don't think we should be banning other risk models."

Representing the perspectives of other digital asset market participants, Chris Perkins, president of CoinFund, voiced his support for the FTX proposal, saying it encourages "much-needed and responsible innovation" in these markets as "leadership and innovation have migrated overseas" outside of the US. Perkins previously served as head of OTC clearing at Citi.

The hearing also touched on the cost of market data and recent volatility.

FTX's Bankman-Fried noted that his firm provides market data at no cost to all participants in contrast to existing models. CME's Duffy acknowledged that his exchange charges for data, but noted that his firm puts a great deal of resources into structuring and adding context to this data.

In regard to market volatility, many legislators expressed concerns about recent drops in cryptocurrency valuations. However, FTX's Bankman-Fried noted that many other assets, including stocks, have also experienced great volatility in 2022.

Looking forward, the CFTC has announced a roundtable on May 25 on the topic of non-intermediation. While the FTX proposal will not be the specific focus, it is expected to receive significant attention.

FIA submitted an extensive response to the CFTC's request for comment on the FTX proposal. The letter emphasized that there are many open questions about the proposed business model and questioned whether it would provide the same protections as the existing structure.

Official Statements and Documents

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