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May 24, 2022

FTX’s Application Raises Serious Questions that the CFTC’s Trading and Clearing Roundtable Should Address

WASHINGTON, D.C.— President and CEO Dennis M. Kelleher issued the following statement on the CFTC’s May 25 public roundtable on intermediation in derivatives trading and clearing, which was precipitated by FTX’s application to offer non-intermediated, margined clearing of Bitcoin futures products. On May 11, Better Markets filed a comment letter with the CFTC on FTX’s proposal and today released a fact sheet highlighting the key concerns it raises.

“The CFTC’s May 25 public roundtable on intermediation in derivatives trading and clearing, which was precipitated by FTX’s application to offer non-intermediated, margined clearing of Bitcoin futures products, is an ideal forum to address the many serious questions raised by FTX’s application, which we detailed in our comment letter.  Many of those questions are related to the nature of Bitcoin and cryptocurrencies, which raise serious concerns about the wisdom of further integrating such a volatile, speculative asset class into the financial system.  FTX’s application, if approved, would inevitably result in significantly greater retail participation in speculative futures trading, which would fundamentally transform the futures market.

“Historically, those markets have existed primarily to allow commercial producers and purchasers to hedge price risk, and they have traditionally been populated by large institutional players who have the knowledge, resources, and ability to protect their interests.  Transforming these markets into a largely speculative trading environment would almost certainly be to the detriment of retail traders, if not the financial system and the entire economy.  After all, the prices of everything from cereal to wheat and gas and plastics are tied to commodities prices that are impacted directly and indirectly by trading activities in the commodities markets.

“Participants in the meeting should focus on many key questions including:

  • How will the volatility associated with both cryptocurrency markets and futures trading impact investors?
  • How can investors be protected without the investor protections associated with FCMs?
  • Will the online, phone app-based, check-the-box know your customer questions genuinely satisfy all legal requirements?
  • How will retail traders be protected if they have easy, phone app-based access to trade futures contracts, particularly given such traders tend to perform poorly when engaging in speculative derivatives trading?
  • How would retail traders’ margined positions have faired over the last several weeks of volatility?
  • How will the markets change as purely speculative retail traders become more active and make up a larger proportion of market participants, changing the balance between physical end users and speculators?
  • How will the futures markets perform if all clearing houses are non-intermediated and enable direct margined retail participation, as seems to be the reasonable assumption if FTX’s application is approved?
  • How will more retail traders impact physical market prices, price discovery, hedging costs, and the other institutional participants in the markets?
  • Will additional speculators in the markets lead to, cause, or exacerbate excess speculation?
  • How will the compression of the waterfall from multiple shock absorbers to only a few impact the markets and systemic risk?
  • Will FTX’s platform increase systemic risk given the increased price volatility that may come with increased retail participation?

“These questions on the intermediation in derivatives trading and clearing must be understood and answered before the CFTC can make an informed decision regarding any particular application for non-intermediated, margined clearing of Bitcoin futures products.  Moreover, these questions suggest that a comprehensive framework will need to be developed that will protect market participants, the financial system, and the public from undue risk if such trading and clearing is approved.  We hope the roundtable will address these and related questions as the CFTC conducts its fact finding on these matters.”

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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.

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