Earlier this week, the CFTC published a staff advisory regarding virtual currency derivative product listings. The guidance sets forth five areas of focus for exchanges and clearinghouses in listing a new virtual currency derivatives contract pursuant to Commission Regulation 40.2 or 40.3, including: (1) enhanced market surveillance, (2) coordination with CFTC staff, (3) large trader reporting, (4) outreach to stakeholders, and (5) derivatives clearing organization (“DCO”) risk management.
With respect to prong (1), enhanced market surveillance, the CFTC observed that designated contract markets (“DCMs”) and swap execution facilities (“SEFs”) must establish and maintain an effective oversight program. In reviewing an exchange’s surveillance program, the CFTC stated that staff would assess the exchange’s visibility into the underlying spot markets. Notably, the CFTC stated its belief that a well-designed market surveillance program includes an arrangement to share information with the underlying spot markets, including trade data, and continuous review of relevant data feeds from appropriate spot markets. In addition, the Commission expects that virtual currency contracts are based on spot markets that follow AML and KYC or similar regulations.
With respect to coordinating with CFTC staff, the CFTC conveyed its expectation that exchanges not only engage in regular discussions with the Commission, but that exchanges also provide the CFTC data related to settlements, and coordinate the timing of derivative contract launches to enable the Commission to better monitor trading of newly-listed contracts.
The commission further recommended that exchanges set the large trader reporting threshold for any virtual currency derivative contract at five bitcoin or the equivalent (if the contract is based on other virtual currencies).
Prior to listing new virtual currency contracts, exchanges should solicit comments and views on issues from interested stakeholders. Exchanges should consider including, in any submissions to the CFTC for listing a virtual currency derivative contract, an explanation of substantive opposing views and how the exchange addressed such views or objections. The Commission noted that including as much information as possible will help exchanges to avoid subsequent issues in rolling out the contract.
With respect to the final area of focus, DCO risk management, the CFTC stated that it will review proposed margin requirements and will seek other information relevant to clearing the proposed contract. Such information, the CFTC noted, includes information related to the governance process for approving the proposed contract.