CFTC Publishes New Advisory to Clarify Crypto Futures Trading

The Commodity Futures Trading Commission (CFTC) — the United States’ top-ranking derivatives regulator — has published an advisory providing further guidance to both clearinghouses and exchanges seeking to list cryptocurrencies on their platforms. The cryptocurrency space has been riddled with concerns about the vetting process for contracts, like bitcoin futures, and the CFTC is looking to clear the air.

Staff members have issued the following statement:

“Commodity Futures Trading Commission (“CFTC” or “Commission”) staff believes it is important to encourage innovation and growth in these products, but within an appropriate oversight framework that enables exchanges and clearinghouses to operate within the confines of the core principles. To this end, Commission staff continues to monitor developments in these products and discuss the risks and challenges they present with industry and market participants.”

The CFTC says it’s focusing on the latest “best practices” for launching cryptocurrency derivative contracts, saying that exchanges should be able to monitor “underlying cryptocurrency spot markets” and coordinate with federal regulators. They should also be allowed to contact market participants and request comments regarding pending contract launches.

Division of Clearing and Risk Director Brian Bussey mentioned, “CFTC staff is providing this information, in part, to aid market participants in their efforts to design risk management programs that address the new risks imposed by virtual currency products. In addition, the guidance is designed to help ensure that market participants follow appropriate governance processes with respect to the launch of these products.”

While the advisory is not considered a final “compliance checklist,” it does offer insight pertaining to current CFTC expectations and aims to assist both clearinghouses and exchanges in keeping up with changes in the crypto market. The guidance provided in the report includes enhanced market surveillance, large trader reporting, outreach to stakeholders and derivatives clearing organization (DCO) risk management.

Both CME Group and Cboe Global Markets were among the first trading platforms to launch bitcoin futures contracts in December 2017. At the time, both companies had consulted with the CFTC on a strictly limited basis. Bitcoin’s volatile nature and price swings caused many Wall Street players — including the Futures Industry Association — to request that the CFTC further examine virtual currency derivatives before allowing them to be traded.

Thus far, bitcoin futures have behaved as few new contracts have, and their liquidity continues to grow through limited means. However, a study conducted by the Federal Reserve Bank of San Francisco ultimately discovered that the release of bitcoin futures led to the steep drop in cryptocurrency prices last January by allowing “pessimists” to enter the game.

The CFTC has been in control of bitcoin activity since 2015 through the Commodity Exchange Act. The organization has worked extensively to rid the cryptocurrency space of unregistered futures exchanges and protect consumers from fraud, manipulation and illicit practices.

To read the full advisory, click here.