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  Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders can be successful in both low and high volatile environments, but the strategies employed are often different depending upon volatility. Why Too Much Volatility is a ProblemIn the FX space, lower volatile currency pairs offer less surprises, and are suited to position traders.High volatile pairs are attractive for many day traders, due to quick and strong movements, offering the potential for higher profits, although the risk associated with such volatile pairs are many. Overall, a look at previous volatility tells us how likely price will fluctuate in the future, although it has nothing to do with direction.All a trader can gather from this is the understanding that the probability of a volatile pair to increase or decrease an X amount in a Y period of time, is more than the probability of a non-volatile pair. Another important factor is, volatility can and does change over time, and there can be periods when even highly volatile instruments show signs of flatness, with price not really making headway in either direction. Too little volatility is just as problematic for markets as too much, we uncertainty in excess can create panic and problems of liquidity. This was evident during Black Swan events or other crisis that have historically roiled currency and equity markets. In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders can be successful in both low and high volatile environments, but the strategies employed are often different depending upon volatility. Why Too Much Volatility is a ProblemIn the FX space, lower volatile currency pairs offer less surprises, and are suited to position traders.High volatile pairs are attractive for many day traders, due to quick and strong movements, offering the potential for higher profits, although the risk associated with such volatile pairs are many. Overall, a look at previous volatility tells us how likely price will fluctuate in the future, although it has nothing to do with direction.All a trader can gather from this is the understanding that the probability of a volatile pair to increase or decrease an X amount in a Y period of time, is more than the probability of a non-volatile pair. Another important factor is, volatility can and does change over time, and there can be periods when even highly volatile instruments show signs of flatness, with price not really making headway in either direction. Too little volatility is just as problematic for markets as too much, we uncertainty in excess can create panic and problems of liquidity. This was evident during Black Swan events or other crisis that have historically roiled currency and equity markets. Read this Term.”

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  Clearing Clearing is a general term that simply means many different things depending on the subject and related industry. Most commonly, this refers to the reciprocal exchange between banks of checks and drafts, and the settlement of the differences, or the total of claims settled at a clearinghouse. In finance and banking, the word clearing has different meanings depending on the more specific business model. Moving checks from the bank where they were deposited to the bank on which they were drawn. This gives credit to the bank where funds are deposited and a corresponding debit to the account of the paying institution. The Federal Reserve operates a nationwide check-clearing system. Clearing also is used to signify matching buyers and sellers in stock, futures, and options transactions. Understanding ClearingToday, any type of payment can be cleared. A credit card payment is cleared through the payment merchant. It can be said that clearing is the settlement of balances and transactions. There is also an act of cleaning contracts and risk through A clearinghouse, like CME Clearing, which is an intermediary between buyers and sellers in the derivatives market. As the intermediary or counterparty, to every trade, CME Clearing acts as the buyer for every seller and the seller for every buyer for every transaction on an exchange. Stocks are cleared through global stock exchanges similar to the New York Stock Exchange (NYSE). The clearing is the process of updating the accounts of the trading parties and arranging for the transfer of money and securities. Clearing is a general term that simply means many different things depending on the subject and related industry. Most commonly, this refers to the reciprocal exchange between banks of checks and drafts, and the settlement of the differences, or the total of claims settled at a clearinghouse. In finance and banking, the word clearing has different meanings depending on the more specific business model. Moving checks from the bank where they were deposited to the bank on which they were drawn. This gives credit to the bank where funds are deposited and a corresponding debit to the account of the paying institution. The Federal Reserve operates a nationwide check-clearing system. Clearing also is used to signify matching buyers and sellers in stock, futures, and options transactions. Understanding ClearingToday, any type of payment can be cleared. A credit card payment is cleared through the payment merchant. It can be said that clearing is the settlement of balances and transactions. There is also an act of cleaning contracts and risk through A clearinghouse, like CME Clearing, which is an intermediary between buyers and sellers in the derivatives market. As the intermediary or counterparty, to every trade, CME Clearing acts as the buyer for every seller and the seller for every buyer for every transaction on an exchange. Stocks are cleared through global stock exchanges similar to the New York Stock Exchange (NYSE). The clearing is the process of updating the accounts of the trading parties and arranging for the transfer of money and securities. Read this Term 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.”