DeFi: CFTC Asks for Public Comment on FTX Request for “Non Intermediated Model”

The Commodity Futures Trading Commission (CFTC) says it has received inquiries from derivatives clearing organizations (DCO) or potential DCO applicants seeking to offer clearing of margined products directly to participants, such that participants would not clear through a futures commission merchant intermediary a non-intermediated model – AKA DeFi.

According to the Request for Comment regarding FTX, the proposal is as follows:

“FTX has requested an amended order to permit it to clear non-intermediated, margined products. FTX intends to offer its products to retail participants, and its financial and operational requirements for participants only require that the participant be able to post the margin required for a given position.

FTX’s model does not contemplate receiving any funds from a participant not on deposit when the trade is executed. FTX has two margin requirements for its participants, the initial margin requirement and the maintenance margin requirement. The initial margin requirement is the amount of margin the participant must post to open a position. Maintenance margin is a set minimum percentage of the notional value of the portfolio that the margin on deposit must exceed. A participant’s margin level is recalculated every 30 seconds as positions are marked to market, and if the collateral on deposit falls below the maintenance margin level, FTX’s automated system will begin to liquidate the portfolio. The automated system will liquidate 10 percent of a portfolio at a time by placing offsetting orders on the central limit order book. Once the liquidation process results in collateral on deposit that exceeds the maintenance margin requirement, the liquidation will stop. Because the liquidation is done automatically and positions are marked to market every 30 seconds, these liquidations can occur at any time, on a “24-7” basis.”

The CFTC states that there is a formal request from LedgerX, LLC d.b.a. FTX US Derivatives (FTX) to amend its order of registration as a DCO to allow it to modify its existing non-intermediated model.

FTX explains that it aims to clear derivatives products that are not fully collateralized through a direct access market for both retail and institutional participants, leveraging its experience offering exchange and clearing services directly to market participants.

Instead of weighing the creditworthiness of intermediaries, FTX will margin all products directly against each market participant, which enables FTX to know and manage the precise amount of risk held by each portfolio, as well as by all portfolios in aggregate, at any given moment.

A review and subsequent approval of a non-intermediated process would be transformational for the industry.

Comments have already been received by the CFTC. For example, SkyBridge Capital, founded by Anthony Scaramucci, has sent a letter strongly supporting FTX’s request to amend its order as proposed.

The global law firm of Jones Day states “there are sound reasons for the Commission to approve the Proposal as submitted by FTX, consistent with the requirements of the Commodity Exchange Act and Commission Regulations. We also believe that approving the Proposal will make for good policy.”

The CFTC is seeking public comment on FTX’s request, including both on specific questions and policy issues raised by the use of a non-intermediated model in this manner.

Comments should be submitted on or before April 11, 2022

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