The US CFTC has just stated its worries related to the launch of Bitcoin futures contracts and regulated binary options. As the CME, the CBOE and Cantor Exchange are each preparing to launch their own derivatives products, the securities regulator states that the firms need to address inherent risks from their offerings.
Both Chicago-based exchanges, the CME and the CBOE, are planning to launch self-certified Bitcoin futures, while Cantor Exchange plans to offer a self-certified binary options contract.
According to the CFTC, unregulated exchanges will have to enter into data sharing agreements with the CME, the CBOE and Cantor Exchange to prevent market manipulation.
The CFTC’s Chairman, J. Christopher Giancarlo, said: “Bitcoin, a virtual currency, is a commodity unlike any the Commission has dealt with in the past. As a result, we have had extensive discussions with the exchanges regarding the proposed contracts, and CME, CBOE, and Cantor have agreed to significant enhancements to protect customers and maintain orderly markets. In working with the Commission, CME, CBOE, 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.”
Unregulated Markets Prompt Market Manipulation Concerns
Over the past weeks, the CFTC has held discussions with the CME, CBOE and Cantor Exchange over their Bitcoin futures and binary options plans. The parties agreed to significant enhancements to contract design and settlement procedures. The CME is also addressing margining, at the request of CFTC staff.
The regulator is outlining that to have adequate market surveillance, the underlying cash Bitcoin exchanges will need to share information with their regulated counterparts. In other words, the unregulated crypto exchanges will need to share information to assist the CME, CBOE, Cantor and the CFTC with surveillance.
“The Commission, CME, CBOE, and Cantor will also coordinate to the extent possible in any surveillance activities, including providing the CFTC with additional surveillance information,” the CFTC’s statement outlines.
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As Giancarlo said: “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. This includes potential market manipulation and market dislocations due to flash rallies and crashes and trading outages.”
A Bitcoin Investor’s Nightmare?
Data sharing between unregulated crypto exchanges, their traditional counterparts and the CFTC admittedly sounds like a nightmare to the crypto investor community. While the regulator fears market manipulation by market participants in the cash Bitcoin market, crypto enthusiasts are fearful of the government and traditional Wall Street taking over the asset class.
The CFTC expects to be assessing the situation as it evolves after the prospective launch of the contracts to determine whether further changes are required to the contract design and settlement processes.
Once the contracts are launched to market, CFTC staff will engage in a variety of risk-monitoring activities. These 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 position stress testing.
“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’s statement concludes.
What if Bitcoin Exchanges Refuse?
While the CFTC urges the actions described above, the unregulated Bitcoin exchanges (and even the ones regulated outside of the US) do not need to comply. The CME has stated that only select exchanges will be participating in the formation of its Bitcoin futures price (Bitstamp, GDAX, itBit and Kraken).
If the exchanges that do participate submit their data, others that are not tapped by the CME will most certainly refuse to.
Even if data is submitted by some exchanges, others will still be able to execute orders that could in theory impact prices materially. So even if the CFTC gets some data, that won’t ‘secure’ the market against manipulation.