The Chicago Mercantile Exchange (CME) and the CBOE Futures Exchange (CFE) self-certified new contracts for Bitcoin futures and the Cantor Exchange (Cantor) self-certified a new contract for Bitcoin binary options.
CFTC Chairman J. Christopher Giancarlo said that Bitcoin is a commodity unlike anything the CFTC has dealt with in the past and they have held extensive discussions with exchanges on proposed contracts. As a result of these conversations, the CME, CFE and Cantor have agreed to enhancements to protect customers and maintain orderly markets.
“In working with the Commission, CME, CFE and Cantor have set an appropriate standard for oversight over these Bitcoin contracts given the CFTC’s limited statutory ability to oversee the cash market for Bitcoin,” said Giancarlo. “Market participants should take note that the relatively nascent underlying cash markets and exchanges for Bitcoin remain largely unregulated markets over which the CFTC has limited statutory authority. There are concerns about the price volatility and trading practices of participants in these markets. We expect that the futures exchanges, through information sharing agreements, will be monitoring the trading activity on the relevant cash platforms for potential impacts on the futures contracts’ price discovery process, including potential market manipulation and market dislocations due to flash rallies and crashes and trading outages. Nevertheless, investors should be aware of the potentially high level of volatility and risk in trading these contracts.”
The CFTC staff reportedly held “rigorous” discussions with the CME over the course of six weeks, CFE over the course of four months, and had numerous calls with Cantor. The Commission said the CME, CFE and Cantor agreed to significant enhancements to contract design and settlement, and CME to margining, at the request of Commission staff, as well as more information sharing with the underlying cash Bitcoin exchanges to assist CME, CFE, Cantor and the CFTC in surveillance.
As trading on these vehicles evolve, the CFTC said it will continue to assess whether further changes are required to the contract design and settlement processes and work with the DCMs to effect any changes.
Once the contracts are launched, CFCTC staff will monitor the risk of these contracts. These activities include monitoring and analyzing the size and development of the market, positions and changes in positions over time, open interest, initial margin requirements, and variation margin payments, as well as stress testing positions. Commission staff will additionally conduct reviews of designated contract markets, derivatives clearing organizations (DCOs), clearing firms and individual traders involved in trading and clearing bitcoin futures.
The CFTC added that it will also work closely with the National Futures Association (NFA).
NFA has issued an investor advisory on this topic to its members, including futures commission merchants and introducing brokers that are involved in the trading of any virtual currency futures product, and will closely monitor its member firms trading this product. If the Commission determines that the margin the DCOs hold against bitcoin futures positions is inadequate, it can take measures to require that the margin held at the DCOs be increased, including requiring that they use a longer margin period of risk to generate margin requirements.
The CFTC said completion of the processes described above is not a Commission approval. It does not constitute a Commission endorsement of the use or value of virtual currency products or derivatives. It is incumbent on market participants to conduct appropriate due diligence to determine the particular appropriateness of these products, which at times have exhibited extreme volatility and unique risks.
The CFTC Published a “Backgrounder” on Bitcoin Contracts embedded below.