The Commodities Futures Trading Commission (CFTC) has voted to propose a rule aimed at protecting customers making trades through a derivatives clearing organization.
Tagged the “Protection of clearing member funds held by derivatives clearing organizations,” the rule would require DCOs, which are registered with the agency and clear trades, to separate customer funds from the company’s.
“One significant motivation, in my humble opinion, for taking the steps that we’re taking today would be the illustration of the bankruptcy and significant risk management corporate governance failures at FTX,” CFTC Commissioner Johnson said during the meeting. “They illustrate the magnitude of losses that customers may experience in the absence of regulation that prohibits commingling of customer funds or member property.”
During the vote, two CFTC Commissioners Summer Mersinger and Christy Goldsmith Romero voted no, while CFTC Commissioner Kristin Johnson and CFTC Chair Rostin Behnam voted yes. The next step is for the proposal to be opened for public comments
FTX was a crypto company that fits the description of DCOs that are to be included in the proposed rule. However, it was not registered with the CFTC, which says the company commingled customer funds. This was later confirmed by FTX CEO Sam Bankman-Fried’s conviction for misappropriating billions of dollars of customers’ funds.
“The proposed rule would ensure that clearing member funds and assets receive proper treatment if a DCO enters bankruptcy by requiring segregation of clearing member funds from the DCO’s own funds and that the funds be held in a depository that acknowledges in writing that the funds belong to clearing members, not the DCO,” Behnam said.
Ongoing Concerns on FTX
The collapse of FTX has become a major concern to decision makers, lawmakers, and regulators like the CFTC in the U.S. As a result, many proposals have been made concerning crypto regulation in general.
This has emboldened the securities and exchange commission (SEC) to crack down on the crypto industry this year, dragging top crypto exchanges like Coinbase and Binance to court.
Up to this time, the CFTC has protections for funds that belong to customers of a futures commissions merchant, CFTC Chair Behnam said, but that’s not the case for funds belonging to clearing members of a DCO.
The rule is therefore a great step in the right direction that will go a long way in protecting customers of such DCOs.
Approving More DCOs
Though the CFTC is calling for a rule to protect customers from clearing DCOs, it isn’t in any way opposed to creating new ones. This is evident in its decision to approve another new DCO.
The agency voted on Wednesday to grant crypto derivatives exchange Bitnomial a license to be a DCO. This will permit the exchange to clear futures and options trades going forward.
“Our aim is to introduce a global derivative trading platform, regulated in the U.S., that marks a pivotal shift from traditional USD and Treasury margin collateral to incorporating digital assets as collateral as well. This change is intended not just for crypto trading but also for a broad spectrum of physical and digital commodities,” said Luke Hoersten, CEO of Bitnomial.
The exchange boasts of being the “first and only crypto-native exchange with a full set of U.S. derivatives exchange, clearinghouse, and broker licenses.”