CFTC Warns Clearing Firms on Push into Digital Assets

The US Commodity Futures Trading Commission (CFTC) has published a Staff Advisory on the risks associated with clearing organisations expanding into digital assets product, stating it will “remain focused on the potentially heightened risks that may be associated with certain of those clearing activities”.

In a separate release, CFTC commissioner Kristin Johnson issued a statement highlighting the “urgent need” for the regulator to initiate a formal rulemaking process to meet the challenge associated with the “heightened” risks.

In the advisory, the CFTC’s Division of Clearing and Risk (DCR) “reminds” registrants that it expects them to “actively identify new, evolving, or unique risks and implement risk mitigation measures tailored to the risks that these products or clearing-structure changes may present”.

In her statement, Johnson says, “While I support the Staff Advisory, the rationale for such a notice indicates the increasingly urgent need for the Commission to initiate a formal rulemaking process that invites a comprehensive evaluation of “heightened” risks associated with certain crypto clearing activities, ensures parallel customer protections apply across our markets for similar clearing activities, and proposes appropriate measures to mitigate unique as well as traditional risks.”

She further specifies these rules should address conflicts of interest arising from vertical integration of activities and functions; custody and client asset protection; operational and technological risk, specifically cyber-risks; and market manipulation and fraud.

“Unless we introduce parallel regulation, these crypto-commodity derivatives clearing models may not be subject to the most rigorous regulatory standards,” Johnson continues. “It is also imperative to note that these models may solicit or market products to retail or individual investors. In other words, we may be exposing the most vulnerable investors –investors entering our markets with hard-earned cash from a long day’s work – to platforms with the higher risk management exposures and lower customer protections.”