The proposal of FTX to bring changes to the existing derivatives clearing model remains to be a hot topic of discussion among derivatives experts. Though the majority of the industry agreed on the potential of such reforms in the post-trade market structure, they unequivocally remained skeptical of FTX’s plans.
FTX, which operates a crypto exchange, suggested an auto-liquidation mechanism that would close out clients' positions if the margin falls below a pre-determined threshold.
“Auto-liquidation, or any type of liquidation, comes with significant responsibility, and there needs to be a certain amount of judgment that's used in exercising that,” Alicia Crighton, the Co-Head of Global Futures at Goldman Sachs, said in a panel discussion at FIA’s IDX. “While auto-liquidation is compelling when we think of risk and volatility in the system, it is not the right answer in all instances and circumstances.”
In addition, he pointed out the lack of transparency in the proposed model.
Only for Crypto?
FTX only proposed the changes in the clearing mechanisms for cryptocurrency futures and options, but the derivatives industry players believe that it will reach all other asset classes.
“I think [the FTX proposal] will help us to evolve the model. The model should evolve, but I do think where we probably end up is in some sort of a hybrid structure,” Crighton added. “We have to be cautious about how we do it, but I do think there is space for a hybrid model.”
Also, FTX’s proposed model received criticism from the US Futures Industry Association (FIA), which wrote long critical feedback to the Commodity Futures Trading Commission (CFTC).
But, auto-liquidation is not the only concern of the derivative experts. They are also worried about the direct clearing approach.
If implemented, it would end the role of futures commission merchants (FCMs), which are responsible for collecting margins and ensuring the availability of enough margins for holding the positions.
“We face clients, we face CCPs, but altogether we do so much more for clients, from our capacity to analyze the credit risk of all our clients to accompanying our clients day to day with their level of risk, proposing potential margin financing, cross-margining and optimization. All those kinds of things that these kinds of companies cannot offer,” said Maylis Dubarry, the Global Co-Head of Prime Services at Société Générale.
