CFTC Issues Advisory For Cryptocurrency Derivative Products

News, Regulation | May 22, 2018 By:

The US Commodity Futures Trading Commission (CFTC) has issued a new guidance for exchanges and clearinghouses that want to list cryptocurrency derivative products.

In a joint staff advisory, the agency’s Division of Market Oversight (DMO) and Division of Clearing and Risk (DCR) have offered CFTC-registered companies advice on how to comply with rules when listing financial derivatives based on cryptocurrency. CFTC staff generally believes that the advisory should help companies effectively and efficiently discharge their statutory and self-regulatory responsibilities, while keeping pace with the unique challenges of emerging crypto derivatives.

“The CFTC staff is committed to providing regulatory clarity as much as possible,” said DMO Director Amir Zaidi. “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 advisory highlights certain key areas that require particular attention in the context of listing a new cryptocurrency derivatives contract, including enhanced market surveillance, close coordination with CFTC staff, large trader reporting, outreach to member and market participants, and Derivatives Clearing Organization risk management and governance.

“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,” DCR Director Brian Bussey said. “In addition, the guidance is designed to help ensure that market participants follow appropriate governance processes with respect to the launch of these products.”

Cryptopcurrency has been considered a commodity under US law since 2015, and is thus subject to the Commodity Exchange Act as enforced by the CFTC. Since then, the CFTC has issued proposed guidance on what is a derivative market and what is a spot market in the cryptocurrency context. It also issued warnings about valuations and volatility in spot virtual currency markets.

Commenting on the new guidance, CFTC Commissioner Rostin Behnam said the advisory is another step in providing the public with greater transparency into the process of listing crypto derivative products.

“While this staff advisory clarifies expectations, it does not equate a change to the regulatory process,” said Behnam. “Such changes require a more fulsome and formal process, subject to Commission deliberation and public notice and comment. I look forward to continuing to explore our options, which I hope will include some parameters for determining when self-certification may not be appropriate, and for determining when such matters are appropriately brought before the Commission.”