CFTC Chair J. Christopher Giancarlo reasserted the “obligation of futures exchanges to ensure that virtual currency futures are not susceptible to manipulation, and of futures clearinghouses to ensure that such products are adequately risk managed.” In remarks at the ABA Derivatives and Futures Section Conference in Naples, Florida, CFTC Chair J. Christopher Giancarlo described the impact of virtual currencies on the U.S. derivatives markets and reiterated his support for a deference-based approach to the U.S. and European Union cross-border regulation of swaps.
Chair Giancarlo said that virtual currencies have already had significant effects on the markets. He raised questions about their actual value, given their high volatility and instability as a store of value. He also argued that virtual currencies represent a small asset class that receives outsized media attention, but warned that they present serious risks.
While acknowledging that the CFTC has been criticized for not holding public hearings prior to self-certification of Bitcoin futures, Chair Giancarlo argued that there is no provision in the statute for public input on CFTC staff reviews of such new product actions. Mr. Giancarlo declared that the CFTC is attentive to these concerns, and offered an eight-point checklist of objectives that the CFTC will undertake in future reviews of such certifications.
As to the appropriateness of trading Bitcoin or other cryptocurrencies, Chair Giancarlo reported that the CFTC reached an agreement with two of the primary exchanges for additional measures to be taken with respect to exchange trading of these products. These measures include:
- Designated contract markets (“DCMs”) setting exchange large-trader reporting thresholds at five Bitcoins or less;
- DCMs entering direct or indirect information-sharing agreements with spot market platforms to allow access to trade and trader data;
- DCMs agreeing to engage in the monitoring of price settlement data from cash markets, and in identifying anomalies and disproportionate moves;
- DCMs agreeing to conduct inquiries, including at the trade settlement and trader level, when anomalies or disproportionate moves are identified;
- DCMs agreeing to regular communications with CFTC surveillance staff on trade activities that include providing trade settlement and trader data upon request;
- DCMs agreeing to coordinate product launches to enable the CFTC’s market surveillance branch to monitor minute-by-minute developments; and
- DCOs setting substantially high initial and maintenance margin for cash-settled instruments.
With regard to cross-border derivatives regulation, Chair Giancarlo affirmed his support of the recent CFTC margin comparability determination with the European Commission. He said that the comparability determination constitutes complete substituted compliance, meaning that the CFTC will defer to European regulators when market participants follow EU margin rules, even if this means certain non-financial counterparties are not subjected to variation margin rules when they would be under the CFTC framework.
Lofchie Comment: The SEC and the CFTC have taken philosophically opposing views with respect to the ability of investors to trade in cryptocurrencies. The SEC Division of Investment Management previously announced that it would not allow the registration of an investment company to go forward if the company were to be significantly involved in trading cryptocurrencies. By contrast, Chair Giancarlo has acknowledged the risks of these products, but determined not to prevent trading in them.
To some extent, the different conclusions reached by the regulators may reflect the differing investor bases. Investment companies are likely to attract a retail investor base, while futures traders are more likely to be institutions. Further, through his negotiations with the exchanges, Chair Giancarlo was actually in a better position than the SEC would have been to impose additional prudential requirements on the trading of cryptocurrencies. Still, Chair Giancarlo leaves himself vulnerable to second-guessing if there are material negative developments with trading cryptocurrencies, while the SEC has taken the politically safer path. In so doing, Chair Giancarlo should be respected for his willingness to take some political risk on the basis of the view that the Government can not, and should not, prevent individuals from deciding to take economic risk.