On May 21, the Commodity Futures Trading Commission released a staff advisory that provides guidance to designated contract markets (DCMs) and swap execution facilities (SEFs) that plan to list virtual currency derivatives for trading and clearing organizations (DCOs) intending to clear virtual currency derivatives. The advisory notes that the CFTC’s recommendations are informed by the unique characteristics of virtual currencies that make obtaining information about the spot market difficult, including the fact that the commercial uses for virtual currencies are less developed than the commercial uses of other products underlying derivatives, and there is less price verification. The advisory addresses the need for enhanced market surveillance, coordination and communication with CFTC staff, large trading reporting, outreach to relevant stakeholders and risk management of DCOs.
As it relates to market surveillance, the CFTC recommends that DCMs and SEFs seek to (1) establish information sharing arrangements with the underlying spot markets; (2) conduct real time monitoring of trading activity (including data feeds from spot markets); and (3) undertake additional inquiries if unusual patterns are discovered. The CFTC also notes that it believes existing large trader reporting may be helpful in identifying manipulative activity and recommends exchanges set large trader reporting thresholds for any virtual currency derivative contract at 5 bitcoin (or the equivalent for other virtual currencies). As it relates to expected outreach, the CFTC expects that an exchange that plans to list a virtual currency derivative will seek comment from relevant market participants and consider how to address opposing views it receives. Finally, the CFTC will consult with any DCO that proposes to clear virtual currency derivatives. The CFTC will evaluate proposed margin requirements as well as the DCO’s internal governance procedure for approving the virtual currency derivatives and its adherence thereto.
The CFTC’s advisory is available here.