The crypto exchange, FTX has proposed changes to the existing US derivatives clearing rules, mostly by bringing automation. As the Commodity Futures Trading Commission (CFTC) sought industry feedback on the proposals, the established futures market participants came in as critics.
The Futures Industry Association (FIA), which includes the likes of Goldman Sachs, JPMorgan and other major US derivatives participants, on Wednesday said that FTX’s “model could exacerbate financial instability in a time of heightened market volatility .”
In addition, in its 24-page response, the industry body highlighted the use of the proposed system for “market manipulation.”
Cutting Out Intermediaries
FTX, which is known for operating a crypto trading venue, entered the US derivatives market with the acquisition of a CFTC-regulated derivatives exchange and clearing house. Now, it is seeking the US derivatives regulator’s approval to offer clearing of margined products directly to participants, without the involvement of futures commission merchants (FCMs).
In the existing market, FCMs collect all the margins and ensure the availability of enough margin for executing a trade or holding to a position. They are responsible for margin calls in case of a shortfall of funds and contribute to the guarantee-funds of clearinghouses.
FTX wants to bring the crypto market’s system to the traditional derivatives industry. It wants traders to deposit collateral in their FTX accounts. The platform will automatically calculate the margin cover every 30 seconds every day and will trigger a liquidation in case of a shortfall.
Impacting the Entire Market
FTX currently deals only with cryptocurrency derivatives. But, approval of its proposals would only kick the implementation of such measures in the traditional asset markets, the FIA pointed out.
“During market turbulence, immediately liquidating a large participant during cascading markets can be procyclical, add to market volatility and may cause further defaults,” the association stated.
“A directional market subject to an auto-liquidation model has a tendency to be very procyclical and, thereby, this model could exacerbate financial instability in a time of heightened market volatility. This impact could very well be worse in the retail context, in which retail participants often move in packs and the effect of liquidating hundreds of retail accounts at once could be enormous.”
Further, the FIA highlighted that FTX’s proposal did not clarify all the market scenarios. It includes automated margin calculation for 'backstop liquidity providers' or in the scenarios like 'fat finger' errors when the trader unintentionally makes errors when typing the order details.
Also, an around-the-clock automated system cannot be implemented for fiat margin calls which require banks to be open.
“The 24/7/365 nature of the FTX model, compared to the current model of regular trading hours during weekdays, creates the potential for disparities among the exchanges and potential impacts to price formations, trading behaviors, including disruptive trading behaviors,” the FIA added.
“The FTX model contemplates liquidating positions in a manner different from other models which could have wider market impacts.”
