What has happened?

The Commodity Futures Trading Commission’s (CFTC) has issued a joint staff advisory that gives exchanges and clearinghouses registered with it guidance for listing virtual currency derivative products.

What does this mean?

Issued by the CFTC Division of Market Oversight and the Division of Clearing Risk, the advisory provides guidance on certain enhancements when listing a derivative contract based on virtual currencies.

The CFTC stressed that the guidance is not a "compliance checklist", but rather clarifies the CFTC's staff's priorities and expectations in its review of new virtual currency derivatives to be listed on a designated contract market or swap execution facility, or to be cleared by a derivatives clearing organisation.

In its press release, the CFTC says that staff believe that the advisory should help exchanges and clearinghouses to discharge their statutory and self-regulatory responsibilities, "while keeping pace with the unique challenges of emerging virtual currency derivatives".

The advisory highlights key areas that require particular attention in the context of listing a new virtual currency derivatives contract:

  • Enhanced market surveillance.
  • Close co-ordination with CFTC staff.
  • Large trader reporting.
  • Outreach to member and market participants.
  • Derivatives Clearing Organisation risk management and governance.

Commenting on the advisory, CFTC Chairman J. Christopher Giancarlo said:

"US futures exchanges and clearinghouses are self-regulatory organizations for the markets they operate. As front-line regulators, they should be proactive, flexible and engage in heightened review of new virtual currency contracts and their oversight to ensure proper surveillance of the trading and clearing of these contracts given the risks."

Commissioner Rostin Behnam said:

"While this staff advisory clarifies expectations, it does not equate a change to the regulatory process. Such changes require a more fulsome and formal process, subject to Commission deliberation and public notice and comment."

The advisory states that as new products are brought forth (e.g., uncleared or physically settled derivatives), staff will re-evaluate and revisit the advisory to address any concerns raised by these products and not covered under this advisory.

The past week was a busy one for the CFTC and the Securities and Exchange Commission, as they continue their focus of rooting our fraud from the virtual currency space.

Other noteworthy developments included the SEC launching a fake cryptocurrency website to educate investors about the risks attached to initial coin offerings, while the CFTC signed an agreement with the North American Securities Administrators Association (NASAA) for greater information sharing between federal commodities and state securities regulators.

On the same day the CFTC and NASAA signed their agreement, securities regulators in North America also launched "Operation Cryptosweep", which involved dozens of investigations into potentially deceitful cryptocurrency investment products in one of the largest co-ordinated series of enforcement actions by state and provincial officials to crack down on cryptocurrency scams.

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