FTX Billionaire Sam Bankman-Fried Seeks Knighthood At The CFTC’s Round Table

Last Wednesday, the Commodity Futures Trading Commission (CFTC) held a gathering of senior financial industry leaders on key topics included in the license change proposal returned by the crypto exchange FTX.US to US futures regulators. We talked about “elimination of intermediaries”. March.

Despite the mundane words, the outcome of this conference is very close. If approved, by proposal, FTX.US (and a company with a similar Designated Clearing Authority (DCO) license) retails margin trading for crypto derivatives without the required involvement of Futures Merchants (FCM) companies. Can be provided to customers. The latter is the counterpart of the futures market of broker-dealers in the securities industry, which is “unmediated” or removed from the middle.

Launched in 2019 as a derivatives-focused cryptocurrency exchange, FTX caters to an active and professional trading audience already trading futures on Bahama-based units without intermediaries. .. However, this service is not available to small US-based clients who need to use FTX.US.

Key player

The event was chaired by CFTC Chair Rostin Behnam, supported by an entire five-member committee, and voiced by Senior Policy Adviser Steigerwald.

The roster attended included FTX CEO Sam Bankman-Fried, Fidelity’s Neil Constable, National Futures Association (NFA) Thomas Sexton, Futures Industry Association and other key advocates, and Intercontinental Exchange (ICE) Chris Edmonds. An exchange representative was included. CME Group’s major trading companies such as Sean Downey, Citadel and DRW, asset manager BlackRock, and Chicago-based large banks with large futures businesses such as FCM RJ O’Brien, JPMorgan, Goldman Sachs and Citi.

Main background

Until now, the United States has not prioritized federal law to control cryptocurrency transactions, especially at the retail level. This oversight has led to a lawn war between regulatory agencies. Cryptographic derivatives are a matter of particular concern as the SEC requires tokens to be considered securities and the CFTC oversees derivative contracts based on them. So far, Bitcoin and Ether are the only assets that are considered commodities, and there is plenty of room for debate and interpretation. CFTC Chair Rossin Behnam expressed his desire to regulate both crypto derivatives and spot markets earlier this year, if the necessary funds were available. It may be up to Congress to make the decision.

In that regard, the Agricultural Commission of the House of Representatives hosted its own review of the FTX.US proposal two weeks ago, with five CEOs interacting with the Ag Commission, which has more than 25 members. Lively discussion In a prominent exchange of views between Bankman-Fried and CME Group CEO Terry Duffy, Commission Chair David Scott (D-GA) spoke to CFTC Chair Benham prior to last week’s meeting. I told you.

Key points of the discussion

There were voices calling attention and spending more time reviewing suggestions, but as the days went by, the nature of the comments was an auspicious sign when the issue was brought to vote in front of the CFTC Commissioner. It seemed to be more compatible with the important aspects of the proposal that could be considered as before the end of the summer.

Some of the issues discussed by industry experts are:

• Who will bring the bag? The clearing models of both rivals have a capital “cascade” that begins during periods of very severe market turmoil and limited liquidity. The composition of these models is dramatically different, and the current system relies on mutual losses and standby capital of about 61 companies called Futures Commodities Merchant (FCM). Mutual loss is the concept of sharing losses when an exchange needs capital due to insufficient margin to support the transaction. Conversely, FCM is an option on the FTX.US model, and trader positions are marketed every few seconds instead of once a day, forcing members of the institution’s clearing house to participate in the mutual loss situation. It will not be.
• Remittance Muy Pronto. Most traditional exchanges and FCMs in the room use the balance sheet in the current model to give customers time to credit and more collateral when they approach the margin call threshold. Emphasized the difference in how to give. The FTX.US model is more automated. In other words, if the margin is insufficient, we will trade “automatic clearing”. Here, the trader is responsible for tracking the required margin, keeping in mind the need for collateral that may occur while the client is asleep or on weekends. Bankman-Fried et al. Admitted that the new model is not very convenient, but it is quick to tackle risk and has brought stability to the capital of all market participants. They say that extending credit to participants who lack margins is more costly for all participants if prices start to rise in the direction of continued loss, as FCM is currently doing. Said that it could take. No one knows if the price will return to what it was before it fell sharply.One of such incident The London Metal Exchange was forced to cancel trading under the traditional clearing model in March, showing what could go wrong if it was allowed to lose its position.
• Enter the market. The current model, which focuses on one very large futures exchange and seven bank-owned FCMs, has more meaningful competition as many companies have expressed openness to access to diverse risk models. You can see. The Neil Constable of Fidelity said his employer is literally about private investors, with that in mind and thinking about ways to democratize and create access to financial products. Give this to the client. With the right amount of education, disclosure and transparency.
• Who will crack down on these exchanges? Thomas Sexton of the National Futures Association (NFA) said the regulations are not yet fully compliant with this model. He added: “We spent a lot of time on clearing. Our focus is on retail consumer protection. The basis is to protect these participants. This is how to start a solicitation, customer funding. Includes protection methods, enforcement of risk disclosure, customers and operating funds in the event of a corporate bankruptcy. ”He is still unclear about who will use extended licenses to regulate compliance by these entities. I made a conclusion. He also warned that if there is no independent self-regulatory body (SRO like NFA), CFTC staff will do so.

Important point

Earlier this month, CME Group did not oppose a model that was not itself mediated, joined the Intercontinental Exchange (ICE) and Cboe, and CFTC delayed approval, which FTX.US sees as an unfair advantage. Suggested not to have. The company is off to a start ahead of the competition. However, delays can unreasonably (perhaps months, or even years) withstand well-studied proposals built on moving parts that have precedents within the CFTC universe. A full committee vote on the bill is scheduled for this summer.

Outlook and impact

The fact that senior industry captains have emerged at this all-day event not only leads cryptoregulation and trading in the United States, but also points to significant changes that are likely to come for it. The National Futures Association, CFTC’s policing arm, has the potential to become a regulator of FTX.US and other cryptocurrency exchanges that deal directly with retail customers.

It turns out that the behavior of FCM, which shifts capital from one model to another, is important for which clearing model is prevalent. Bankman-Fried has made some subtle invitations to FCM to adopt the proposed model. This created a hybrid model that was more capital-rich than his company’s original application.

The ball is currently in CFTC court and has heard from the industry and Congress so we can consider and make any necessary changes. If CFTC approves FTX.US’s proposal as expected, private investors have reason to be optimistic that CFTC’s involvement in the crypto market is strong and long-term. This sign of approval provides the reliability and robustness needed for fragmented and promising asset classes that require it. Cryptographic projects get more capital as more cryptocurrencies are brought ashore-retail and institutions-but these entrepreneurs aren’t strong in the past, pushing buttons and taking their eyes off regulation. You need to do things and from a governance perspective.