US Regulatory Body Issues Advisory on Crypto Futures Trading


The US Commodity Futures Trading Commission (CFTC) staff released an advisory on cryptocurrency derivative contracts trading.

Last May 21, the Division of Market Oversight and the Division of Clearing and Risk, both under the CFTC, issued a joint staff advisory providing registered exchanges and clearinghouses with guidance in handling derivative contracts based on virtual currencies. A derivative contract is a written agreement between two parties whose value is based on, in this case, any chosen cryptocurrency.

The CFTC believes that virtual currencies are commodities, and therefore are subject to its oversight and authority under the Commodity Exchange Act.  The advisory is part of the Commission’s exercise of its oversight duty on commodities, and at the same time, responsibility to encourage growth and understanding of the crypto world.

J. Christopher Giancarlo, chairman of the CFTC, said:

“I believe that this advisory should help exchanges and clearinghouses effectively and efficiently discharge their statutory responsibilities as [self-regulatory organizations], while keeping pace with the unique challenges of emerging virtual currency derivatives.”

Amir Zaidi, director of the Division of Market Oversight, added:

“The CFTC staff is committed to providing regulatory quality as much as possible. As the virtual currency market continues to evolve, CFTC staff will seek to provide additional guidance to help market participants keep pace with innovation while complying with CFTC regulations”

The staff plans to review the advisory in the future as a way to keep up with the evolving cryptocurrency market.

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For the Staff, Information is Key

The volatile crypto market is still a newcomer to the financial world.  And for the Commission’s staff, a steady flow of information will help both the Commission and the financial institutions to get a hold of what is happening in this relatively new territory.

Brian Bussey, directory of the Division of Clearing and Risk, stated:

“CFTC staff is providing his information… to help ensure that market participants follow appropriate governance processes with respect to the launch of these products.”

The advisory highlighted key areas that require closer scrutiny in regard to listing virtual currency derivative contracts.

The staff expects designated contract markets and swap execution facilities to conduct an enhanced market surveillance to ensure that listed contracts are not vulnerable to manipulation and price distortion.  An ideal market surveillance program, according to the staff, includes sharing information with relevant spot markets to keep track of data including price changes and transaction volume.

Similarly, the Commission’s staff expects regular discussions between exchanges and the CFTC Surveillance Group. The advisory states that coordination between both the listing exchange platforms and the Commission is vital in detecting and preventing fraudulent activities on the market.

Also, as per the CFTC’s regulations, futures commission merchants and foreign brokers are mandated to report the futures option positions of traders deemed large by the Commission. The staff recommends that, in cases where virtual currency derivative contracts are involved, the reporting threshold should start at traders with future options valued at5 BTC. This is a measure by the Commission to spot and prevent market manipulation.

On top of that, the staff expects exchanges to engage with relevant stakeholders on the crypto derivatives market. By gathering information from different points of view, the exchanges can assess the quality of the contracts and the concerns that might arise from them.

Bitcoin Futures

Late last year, the CFTC collaborated with two huge exchange platforms to properly conduct the first trading of cryptocurrency futures. The Chicago Board Options Exchange (Cboe) and the Chicago Mercantile Exchange (CME) started trading Bitcoin futures last December 2017. The staffs of Cboe, the CME, and the Commission held extensive discussions to ensure that the Bitcoin futures trading is secure and that the transactions conducted are fair.

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