A trade group representing some of Wall Street’s biggest brokers has warned U.S. regulators that cryptocurrency exchange FTX’s proposal to automate risk management in leveraged futures markets lacks sufficient detail to be approved in its current form and could be disruptive.
FTX program created this sense In the financial world, trading methods being developed in crypto markets will find wider application in traditional finance if approved by the Commodity Futures Trading Commission, the U.S. derivatives regulator.
Wall Street’s reaction is eagerly anticipated, as FTX is seeking a license to use computers to perform functions in the futures market that are now delegated to brokers, known as futures commission merchants, the largest of which are affiliates of JPMorgan Chase and Goldman Sachs.
The Futures Industry Association, which represents market participants including FCM, on Wednesday called on the CFTC to seek more information before deciding on the FTX program, describing it as “innovative” and potentially “transformative,” but potentially risky.
“In the context of heightened market volatility, this model could exacerbate financial instability,” the FIA said, adding it was concerned that automated systems could invite “market manipulation” by bad actors.
CFTC A May 11 deadline was set for comments on the FTX proposal, which received mixed reviews. Terry Duffy, chief executive of futures exchange operator CME Group, called it a “clearly inadequate” idea that “poses a significant risk to market stability and market participants.” Given the importance of the issues raised by the FTX, other respondents suggested that the CFTC would be better off developing new regulations.
As a sign of upcoming debate, House committees will hold Hearings Duffy and FTX CEO Sam Bankman-Fried were scheduled witnesses in Thursday’s plan.
Technically, FTX is seeking CFTC approval US Futures Exchange It bought last year to offer leveraged futures contracts that enable investors to hold large positions while offering a fraction of the trade’s value, called margin.
In today’s markets, FCM charges margin and ensures that clients have sufficient margin to support positions. If they don’t, brokers usually ask for more money overnight. They also provide guaranteed funds to clearinghouses (third parties between buyers and sellers of futures) to “set off” losses in major defaults.
FTX will bypass brokers and adopt the system currently used for encryption. It will require clients to deposit collateral into FTX accounts and be responsible for having sufficient margin on hand to meet margin requirements, which are calculated every 30 seconds per year.
If the margin drops too low, automatic liquidation will begin, with FTX first selling the position in 10% increments. In the worst-case scenario, the position will be taken over by a “backing liquidity provider” who has agreed in advance to play this role. FTX will also inject $250 million into the Guarantee Fund.
Although the FTX exchange only trades digital assets, approval of its proposal could clear the way for its approach to be used in other futures contracts.
The FIA argues that key details of the FTX scheme remain unclear — from the reliability of the algorithms used to calculate margin requirements to requirements to “support liquidity providers.” It asked what would happen if market participants made a “fat finger” bug or FTX itself went bankrupt.
The trade association also made a case for human intervention in the market. It said that not only did FCM process deposits, they also tried to ensure that customers had sufficient resources to trade and were mindful of money laundering.
The FIA said automatic liquidation could make matters worse. “During market volatility, immediate liquidation of large players in cascading markets can . . increase market volatility and potentially lead to further defaults,” it said, emphasizing the “expert judgment” of financial services professionals in knowing when to act .
It said that requiring market participants to manage accounts 24/7 is impractical outside of the crypto space, placing an undue burden on investors using bank deposits.
“While markets are open 24/7, meeting margin calls in fiat currency requires banks to be open,” the FIA said. “This is not the world we live in today.”