Major banks have sent a letter to the US CFTC Chairman Giancarlo urging more public discussion before the launch of Bitcoin futures. The members of the Futures Industry Association (FIA) are highlighting that they are baring risk related to clearinghouses worldwide.
As such, every member bank will be effectively carrying risk, whether or not it is helping to make a market in Bitcoin futures. The message was sent by the CEO of the FIA, Walt Lukken. All 64 clearing members of the organization are obliged to guarantee the trades of their customers and as such are carrying systemic risk.
The message is a reaffirmation of the warning from the CEO of Interactive Brokers, Thomas Petterfy. Last month he highlighted his concerns about the systemic risks associated with the launch of the Bitcoin futures contract.
Lack of public discussion is the main worry of the members of the FIA. Exchanges have had to go through a one-day self-certification process in order to offer the product, but the risks associated with it will be carried in part by the banks themselves. Their liability arises from guarantee fund contributions and assessment obligations.
The association outlines: “In light of the CFTC and NFA’s public statements regarding the riskiness of the underlying cryptocurrency products, we believe that the launch of new exchange-traded derivatives in cryptocurrencies deserves a healthy dialogue between regulators, exchanges, clearinghouses and the clearing firms who will be absorbing the risk of these volatile, emerging instruments during a default.”
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“A public discussion should have been had on whether a separate guarantee fund for this product was appropriate or whether exchanges put additional capital in front of the clearing member guarantee fund,” the letter elaborates.
Traditional Financial Industry Backlash or Legitimate Concerns?
We can always say that the banks and regulated brokers are not really keen to legitimise the competition from Bitcoin and cryptocurrencies as a whole. However, the specifications of the contracts that are being launched by the CBOE this coming Sunday and by the CME a week later are concerning.
Cash-settled futures are not impacting the physical market for Bitcoin. On the other hand, the crypto market will be dictating the prices of the futures contracts. Since we have seen numerous ultra-volatile episodes over the past months, the concerns expressed by banks and clearing members should not be completely ignored.
Prospective price manipulation is easy to realize by unidentified groups who hold large reserves of Bitcoin. Any abrupt market moves and exchange outages may cause prices to disappear and the trading halt triggers on the exchanges are not guaranteeing the execution of contracts at a certain price. A short interruption of even a minute can cause significant gaps in prices.
While the CFTC urged regulated exchanges to cooperate on data with the crypto exchanges, the FIA is not convinced that the measure is enough. Since prices of bitcoin are determined separately on every exchange, arbitrage opportunities and market manipulation concerns are justified. However, regardless of the letter, the launch of Bitcoin futures at this point is pretty much a done deal.