After the Chicago Mercantile Exchange Inc. (CME) and the CBOE Futures Exchange (CFE) self-certified new contracts for bitcoin futures products, and the Cantor Exchange (Cantor) self-certified a new contract for bitcoin binary options, the Commodities Futures Trading Commission is now going to hold hearings on the crypto and crypto-futures markets.
Bitcoin, a virtual currency, is a commodity unlike any the Commission has dealt with in the past, said CFTC Chairman J. Christopher Giancarlo. As a result, we have had extensive discussions with the exchanges regarding the proposed contracts, and CME, CFE and Cantor have agreed to significant enhancements to protect customers and maintain orderly markets. In working with the Commission, CME, CFE and Cantor have set an appropriate standard for oversight over these bitcoin contracts given the CFTCs limited statutory ability to oversee the cash market for bitcoin.
Market participants should take note that the relatively nascent underlying cash markets and exchanges for bitcoin remain largely unregulated markets over which the CFTC has limited statutory authority. There are concerns about the price volatility and trading practices of participants in these markets. We expect that the futures exchanges, through information sharing agreements, will be monitoring the trading activity on the relevant cash platforms for potential impacts on the futures contracts price discovery process, including potential market manipulation and market dislocations due to flash rallies and crashes and trading outages. Nevertheless, investors should be aware of the potentially high level of volatility and risk in trading these contracts.
Commission staff held rigorous discussions with CME over the course of six weeks, CFE over the course of four months, and had numerous calls with Cantor. CME, CFE and Cantor agreed to significant enhancements to contract design and settlement, and CME to margining, at the request of Commission staff, as well as more information sharing with the underlying cash bitcoin exchanges to assist CME, CFE, Cantor and the CFTC in surveillance. The Commission, CME, CFE and Cantor will also coordinate to the extent possible in any surveillance activities, including providing the CFTC with additional surveillance information.
As trading on these DCMs evolves, the Commission will continue to assess whether further changes are required to the contract design and settlement processes and work with the DCMs to effect any changes.
Once the contracts are launched, Commission staff will engage in a variety of risk-monitoring activities. These activities include monitoring and analyzing the size and development of the market, positions and changes in positions over time, open interest, initial margin requirements, and variation margin payments, as well as stress testing positions. Commission staff will additionally conduct reviews of designated contract markets, derivatives clearing organizations (DCOs), clearing firms and individual traders involved in trading and clearing bitcoin futures.
The CFTC will also work closely with the National Futures Association (NFA) too. NFA has issued an investor advisory on this topic to its members, including futures commission merchants and introducing brokers that are involved in the trading of any virtual currency futures product, and will closely monitor its member firms trading this product. If the Commission determines that the margin the DCOs hold against bitcoin futures positions is inadequate, it can take measures to require that the margin held at the DCOs be increased, including requiring that they use a longer margin period of risk to generate margin requirements.
As with all contracts offered through Commission-regulated exchanges and cleared through Commission-regulated clearinghouses, the completion of the processes described above is not a Commission approval. It does not constitute a Commission endorsement of the use or value of virtual currency products or derivatives. It is incumbent on market participants to conduct appropriate due diligence to determine the particular appropriateness of these products, which at times have exhibited extreme volatility and unique risks.
And after this limited examination, the CFTC has opted to hold open and public hearings on the bitcoin future. The CFTC said it would convene its technology and risk advisory committees this month to discuss its self-certification process for listing digital currency futures and how those products are risk-managed and policed.
The Securities and Exchange Commission (SEC) and the North American Securities Administrators Association (NASSA) have issued new warnings to investors over the risks of investing in bitcoin, cautioning regulators may not be able to protect them from fraudsters.
The CFTC has upping the regulatory ante over the cryptocurrency market, which has no overriding federal regulator, but is restricted by its limited legal power to actively block exchanges from launching futures products.
CFTC regulations allow designated exchanges to list products for trading without prior CFTC approval by filing a written self-certification with the regulator.
The responsible regulatory response to virtual currencies is consumer education, asserting CFTC authority, surveilling trading in derivative and spot markets, prosecuting fraud, abuse, manipulation and false solicitation and active coordination with fellow regulators, Giancarlo said in a the statement.
Last Thursday, his counterpart at the SEC, Jay Clayton, issued a public warning about the dangers of crypto-investing and that some crypto issue run afoul of the law.
