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Viewpoint - Playing the long game 

Efficiency in the processing of trades is crucial to healthy markets

23 May 2022

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I must admit I enjoyed being back at my old stomping grounds on Capitol Hill two weeks ago. Covid has closed the halls of the US Congress to visitors for the last two years, so it felt extra special to testify in-person before the House Agricultural Committee regarding the new clearing model that FTX US has put forward for consideration by the US Commodity Futures Trading Commission. 

The hearing room of the Ag Committee is beautiful yet intimidating. Maybe it's the ornate, tiered wood dais full of Members of Congress overlooking the witness table. Maybe it's the paintings of past committee chairs staring down at you. Although I have testified in that committee room more than ten times, it never fails to feel special and weighty to do so. 

The recent hearing I attended was the culmination of months of building excitement and attention around the proposal set forth by FTX US to offer a non-intermediated clearing model. It has been the talk of the industry for months, beginning with Sam Bankman-Fried's fireside chat last fall at FIA's Expo conference to FTX's coming-out splash at our Boca conference this spring.

There are many with strong views about the proposal, which represents major changes in the technology of clearing that may disrupt derivatives markets in various ways. For our part, FIA submitted comments to the CFTC expressing concerns on a variety of issues ranging from risk management to customer protection to due process. But let's set aside the specifics of the FTX proposal for a moment. If you take a broader view of what's happening, this is part of a larger trend where technology is revolutionizing the infrastructure of our markets. 

We can all agree that markets benefit from faster settlement of trades and margin, using safe and secure networks. We are seeing this in the securities industry with a  push to move from T+3 to T+1 and even less. Time represents risk—risk that prices change, operations fail, or counterparties renege. Reducing time to settlement can reduce these risks.  

FTX has touted a real-time margining system that is constantly debiting and crediting their market participants to avoid members going into default. They combine this with an auto-liquidation feature for under-margined customers and a self-funded guaranty fund to stand behind large losses.  

While the combination of these tools is unique, many in the industry have similar efforts to quicken the pace of risk management and settlement. In fact, last fall FIA announced an industry blueprint for improving standards that aims to settle give-up and allocated trades real-time in the right account on trade-day. As outlined in that blueprint, FIA has formed the Derivatives Market Institute for Standards (DMIST) that will move the industry towards consensus and shared standards that will enable us to achieve this goal.

Other exchanges are experimenting with blockchain and cloud technology to improve the speed, applications, and transparency of the trading ecosystem. Nasdaq has begun migrating the matching engines at the core of its US options exchanges to a new cloud-based platform. CME has embarked on a 10-year partnership with Google to migrate its technology infrastructure to the cloud, starting with data and clearing services. And Intercontinental Exchange recently bought a minority stake in tZERO, a trading platform for digital securities.

This week the CFTC will host a public roundtable to hear a wide range of industry views on non-intermediation and the FTX proposal. The roundtable will be "must see" WebTV for many of us curious about whether the FTX proposal will be approved, modified, or delayed by the CFTC. This debate is healthy for the industry no matter the outcome, as we thoughtfully consider ways to make the markets more resilient.

But don't be fooled…whatever happens to the FTX proposal, these technology changes are coming, and will have a major impact on the market structure of our industry.

We should welcome responsible innovation that improves risk management and customer protections, and that paves the way for greater efficiency in the processing of trades. That's playing the long game. 

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