CFTC examines self-certification process at public meeting

2 February 2018

On Jan. 31, the Commodity Futures Trading Commission's Market Risk Advisory Committee held a day-long meeting to discuss the self-certification process used by Cboe Futures Exchange and CME Group to launch bitcoin futures. The discussion focused on whether the process provided enough opportunity for regulators and market participants to fully assess the risks of these new products before they began trading in December.

Representatives of several clearing firms, notably Citi, Goldman Sachs and J.P. Morgan, expressed concerns about the lack of consultation with the clearing firm community and stressed the need to make sure that clearing firms are ready to manage the risks before new products are launched.

UBS executive Ed Pla, speaking on behalf of FIA, emphasized the importance of "two-way dialogue" among regulators, exchanges, clearinghouses and clearing firms, and applauded the steps announced by CFTC Chairman Chris Giancarlo on Jan. 19 to ensure more consultation before additional cryptocurrency contracts are launched.

Representatives of Cboe and CME responded that they consulted extensively with clearing firms, market makers and other market participants ahead of the launch, but agreed that there may be ways to improve the feedback process. The exchange representatives also noted that bitcoin futures are not as novel and complex as some may think. Other contracts such as emission futures posed similar challenges in terms of volatility and uncertainty in the underlying market, they explained.

Dale Michaels of OCC, which clears the Cboe contracts, added that his clearinghouse made sure before the launch that its members were prepared to handle a default, and explained why the OCC risk committee rejected the idea of creating a separate default fund for bitcoin futures.

Other market participants were split. Kristin Walters of Blackrock expressed some of the same concerns voiced by the FCMs about the risks of bitcoin, while Jerry Jeske of Mercuria voiced his support for allowing new products to come to market via self-certification.

The meeting also provided an opportunity for CFTC staff to discuss the self-certification process and the challenges presented by the unregulated nature of the underlying market for bitcoin. Amir Zaidi, the director of the CFTC's division of market oversight, made it clear that the CFTC is not responsible for policing the cash market for bitcoin. On the other hand, Cboe and CME are responsible for making sure that their contracts are not susceptible to manipulation, and Zaidi discussed the role of information-sharing agreements between the futures exchanges and the cash markets that supply their pricing references as a mechanism for preventing manipulation.

Giancarlo, who attended nearly the entire meeting, described the changes he has asked CFTC staff to make to their review of any new cryptocurrency contracts, including asking staff to consider ways to improve clearinghouse governance. He also observed that the self-certification process has been very effective in allowing exchanges to innovate. He cited CFTC statistics showing a stark contrast between the 12,000 contracts self-certified since 2000, when the law was changed to permit this process, and the 793 contracts approved by the government during the eight decades prior to that.

CFTC Commissioner Rostin Behnam, who is the sponsor of the advisory committee, sought to strike a balance between allowing exchanges to innovate and establishing the right process for CFTC review of new products. He noted that while the self-certification process does not expressly provide for public input, dialogue between the CFTC, the exchanges and market participants "is vital to the process." At the end of the meeting, Behnam said he was reassured by what he learned about the CFTC's review and praised the participants for a "very transparent and honest discussion" of the issues.

Click here for the agenda, the webcast, and the statements from the CFTC Commissioners.

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