Last week, the Commodity Futures Trading Commission’s (“CFTC”) Division of Market Oversight and Division of Clearing and Risk issued a joint staff advisory providing guidance to exchanges and clearinghouses for listing virtual currency derivatives products.
The advisory relies on established rules and regulations as it clarifies the CFTC’s priorities and expectations in its review of new virtual currency derivatives products. In the press release announcing the advisory, the CFTC stated its intent to exercise “appropriate oversight, while encouraging innovation and growth in these products.”
The advisory sets forth the following key areas requiring heightened attention, each discussed in greater detail in the advisory:
- Enhanced Market Surveillance. The CFTC will generally hold a virtual currency derivatives exchange to the standards it generally enforces for a designated contract market or swap execution facility with respect to maintaining an effective oversight program. For example, a virtual currency derivatives exchange’s market surveillance program should include an information sharing arrangement with the underlying spot market(s) that make up the cash-settlement price in order to facilitate the exchange’s access to a broader range of trade data. Additionally, virtual currency derivatives exchanges should conduct real-time monitoring of relevant data feeds (price, volume, etc.) from the appropriate spot market(s), especially during and around the settlement period, in order to identify disorderly trading and any market or system anomalies. The CFTC also expects that such exchanges’ virtual currency contracts will be based on virtual currency spot markets that follow federal know your customer and other anti-money laundering regulations.
- Coordination with CFTC Staff. The CFTC expects exchanges to engage in regular discussion with the CFTC staff on issues related to the surveillance of virtual currency derivatives contracts. Exchanges are also expected to provide surveillance information and other data as requested. The CFTC noted that it recently worked collaboratively with the Chicago Mercantile Exchange to conduct a review of certain listed bitcoin futures contracts.
- Large Trader Reporting. The CFTC’s Large Trader Reporting System requires certain reporting firms to file daily reports showing the futures and option positions of traders with positions at or above specific reporting levels. The advisory sets the CFTC’s large trader reporting threshold for any virtual currency derivative contract at five bitcoin (or the equivalent for other virtual currencies).
- Outreach to Stakeholders. Prior to listing a new virtual currency derivative contract, the CFTC expects an exchange to solicit comments on a broad scope of issues related to the listing from members and other relevant stakeholders beyond those market participants interested in trading the new contract. The CFTC believes an exchange should include an explanation of substantive opposing views learned from such outreach in its submission to the CFTC for the listing of the new virtual currency derivative contract.
- Derivatives Clearing Organization Risk Management. Once the derivatives clearing organization (“DCO”) that will clear the proposed cleared virtual currency derivative contract has been identified, the CFTC will request certain information from the DCO, including the DCO’s proposed initial margin requirements and information related to the governance process for approving the proposed virtual currency derivative contract. The CFTC expects margin requirements for virtual currency derivatives contracts to exceed those of less volatile commodities and will assess a DCO’s compliance with the CFTC’s product eligibility requirements.
In public remarks, CFTC Chairman, Christopher Giancarlo, noted that the advisory reflects the CFTC’s “current thinking based on [its] growing experience with virtual currency derivatives,” which is subject to reevaluation and revision as new products emerge in the market.