A&O Shearman | FinTech | CFTC Publishes Guidance on Listing Virtual Currency Derivative Products
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  • CFTC Publishes Guidance on Listing Virtual Currency Derivative Products

    On May 21, 2018, the Commodity Futures Trading Commission published guidance signaling how CFTC-registered trading platforms can enhance surveillance practices, reporting, risk management and self-certification in respect of virtual currency derivative products, among other things.  The guidance also summarizes the CFTC’s priorities and expectations in its review of these products.

    The guidance follows a “backgrounder” published by the CFTC earlier regarding regulation of virtual currency derivatives markets and the self-certification process for virtual currency derivative products.  The updated guidance further details the heightened review process outlined in the backgrounder and includes recommendations related to enhanced market surveillance, coordination with CFTC staff, large trader reporting, outreach to stakeholders and derivatives clearing organization risk management. 

    Under the guidance, when listing new virtual currency derivative products, the CFTC expects exchanges to:
    • Include within their enhanced market oversight programs an information sharing arrangement with the underlying spot markets that make up the cash-settlement price of the contracts;
    • Monitor relevant data feeds from virtual currency spot markets to identify anomalies and disproportionate moves, especially during and around the settlement period;
    • Provide surveillance information and data related to the contract’s settlement process to CFTC staff upon request; 
    • Set a large trader reporting threshold of five bitcoin, or the equivalent value of another virtual currency;
    • Solicit comments and views on the listing of any new virtual currency derivative products beyond those required for standard derivative products; and
    • Include in filings to the CFTC an explanation of any substantive opposing views towards the listing of the new contract and how the exchange plans to address these objections.
    Additionally, the CFTC will review the adequacy of a DCO’s proposed initial margin requirements in respect of the risks new virtual currency derivative products could pose and may require adjustments. The CFTC will also review a DCO’s adherence to internal governance procedures for new contract approval and may notify an exchange if the CFTC is concerned about potential violations of the Commodity Exchange Act.

    CFTC staff emphasized that guidance will be reevaluated and revisited as necessary to address any new or heightened concerns raised by virtual currency derivative products or any future products not covered.  Although not a formal rulemaking, this guidance, in conjunction with the CFTC’s initiative to actively engage with the market as discussed by Commissioner Rostin Behnam, is an encouraging development towards a more mature marketplace for virtual currencies.