US Democratic, Republican lawmakers alike voice doubts about FTX crypto derivatives clearinghouse plan

Both Democratic and Republican legislators expressed skepticism about the adequacy of investor protections afforded by FTX’s proposed cryptocurrency derivatives clearinghouse, giving a green light to the US Commodity Futures Trading Commission’s scrutiny of the plan.

“If we were ever going to try to incentivize farmers to get in the market and avail themselves of this fundamental risk-management tool that we call the commodities futures market, I don't see this as an incentive,” Representative Rick Crawford, an Arizona Republican, said at a House Agriculture Committee hearing today.

At the same time, the industry self-regulator overseen by the CFTC rapped the proposal today on a number of grounds, including the lack of regulatory oversight for FTX and doubts about its protections for ordinary investors.

The National Futures Association industry group homed in on the lack of specificity about margin requirements in FTX’s plan.

“From a customer protection standpoint, NFA is particularly concerned about the impact this process may have on a retail participant's ability to successfully trade these markets,” NFA said in a letter to the CFTC. “The higher the leverage permitted, the potential for auto-liquidations to the detriment of customers, even with a minor market move, grows significantly”.

FTX

FTX, headed by Sam Bankman-Fried, has applied to clear margined products for ordinary investors — not just institutions — without a bank acting as intermediary. It currently clears futures and options on futures contracts on a fully collateralized basis for institutional traders alone.

Bankman-Fried, in testimony before the agriculture committee today, called the FTX approach to risk management “sound and conservative.” He said it “promotes equitable access while ensuring adequate customer protections.”

FTX innovations, he added, address “many pain points” in the US derivatives marketplace. And Bankman-Fried stressed the importance of promoting “responsible innovation and competition” in this marketplace.

“I think we should have healthy competition here,” he said.

House Agriculture Committee Chair David Scott, a Georgia Democrat, set the skeptical tone for many lawmakers at the start.

“I am gravely concerned about the potential of this proposal to upset international agreements that the CFTC and this committee have worked so hard to preserve which have deemed our current clearing structure and regulations equivalent to EU and UK rules,” he said.

CFTC

The CFTC, headed by Rostin Behnam, invited public input on the FTX proposal with a comment deadline of yesterday. He also has scheduled a May 25 roundtable of market participants.

The five commissioners will vote on the application at some point afterward.

Behnam said yesterday that the proposal would have to operate in “limited circumstances” if it were to get through regulatory clearance.

He has said he expects that, regardless of the outcome, he expects other proposals for clearinghouses without bank intermediation.