In a recent CFTC Talks podcast, a number of Commission leaders engaged in a lively roundtable discussion to explore a wide arrange of issues associated with the much talked about Bitcoin futures contracts. The new trading products are scheduled to be launched by year-end at the Chicago Mercantile Exchange, Inc. (CME) and the CBOE Futures Exchange (CFE). The all-star panel was composed of Daniel Gorfine, chief innovation officer and LabCFTC director, Amir Zaidi, division of market oversight (DMO) director, Brian Bussey, division of clearing and risk (DCR) director, and Matt Kulkin, division of swap dealer and intermediary oversight (DSIO) director. The roundtable was moderated by podcast host Andrew Busch, the Commission’s first and only chief market intelligence officer.
As widely reported, the CME and CFE recently self-certified new contracts for bitcoin futures contracts. The Cantor Exchange self-certified a new contract for bitcoin binary options contract as well. Various divisions and units at the CFTC worked closely with these exchanges in the contract certification process so as to assure that these products satisfy the legal requirements under the Commodity Exchange Act and Commission regulations. Each of the panelists shared his own unique perspective regarding this collaborative process. Below is snapshot of what each of the roundtable participants had to say.
Daniel Gorfine (LabCFTC). At the onset, Gorfine quoted Chairman J. Christopher Giancarlo, regarding the uniqueness of bitcoin, "this is a commodity unlike any other the CFTC has dealt with in the past." Gorfine provided some useful insights why this is the case. First, Bitcoin is completely virtual and has no physical representation. Second, there is no central government or other party backing bitcoin. Third, any change in underlying Bitcoin software protocol requires a critical mass of Bitcoin miners to adopt such change. Finally, Bitcoin is characterized by unique operational risks. For instance, if a Bitcoin private key is lost or stolen, the value associated with that key may not be recoverable. These unique qualities, according to Gorfine, results in novel regulatory challenges.
Amir Zaidi (DMO). DMO was intimately involved exchanges and facilitated the self-certification process with respect to establishing surveillance, information sharing, and appropriate settlement procedures for the Bitcoin futures contracts. Zaidi believes that enhanced surveillance is called for given Bitcoin’s unique qualities. He indicated that the exchanges were very receptive in this regard.
Brian Bussey (DCR). DCR focused on the clearing and margin related aspects for the new contracts. The CME’s clearinghouse will serve as the clearing entity for its product, while the Options Clearing Corporation (OCC) will serve as the clearing organization for its instruments. Bussey indicated his central concerns revolved around appropriate margin levels to be set for these contracts given the extraordinary volatility associated with the underlying Bitcoin markets; 20 percent daily moves are not unprecedented. Bussey indicated that the exchanges initially proposed margin levels of 27 percent. By way of comparison, the initial margin for the S&P 500 index contract is 5 percent. The CME agreed to increase the initial margin for its contract to 35 percent and the CFE agreed to an increase of 40 percent initial margin.
Matt Kulkin (DSIO). While humbly acknowledging that DMO and DCR handled the lion’s share of the Commission’s work in connection with the new Bitcoin contracts, Kulkin noted that he is particularly interested in the potential impact these new instruments will have on the FCM community and the additional stress they will introduce into the system. DSIO has also worked closely with the National Futures Association (NFA) the industry’s self-regulatory organization, so as to assure that the investing public is adequately apprised of the risks associated with the new contracts. Kulkin added that the NFA may end up requiring notice filings from its membership if they are utilizing these products.
The CFE looks to roll out its flagship bitcoin product on December 10while the CME aims launch shortly thereafter on December 18.
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