On October 9, 2014 the CFTC’s Global Markets Advisory Committee held a meeting focused on the clearing of Non-Deliverable FX Forwards and also with respect to bitcoin. This post will focus exclusively on the discussion related to bitcoin.
A few highlights from the discussion on bitcoin include the following:
Thomas Leahy from the CFTC staff summarized the process for self-certifying bitcoin derivatives and provided background on TeraExchange’s self-certification of a non-deliverable forward on bitcoin. His presentation contained these notable points:
- Self Certification: Mr. Leahy noted that CFTC regulation 40.2 provides a mechanism for Swap Execution Facilities (SEFs) to self-certify contracts for listing. Self-certified contracts are not approved by the CFTC. However, after receiving a self-certification filing the CFTC’s stall conducts an in-depth review of the contract to ensure it complies with the Commodity Exchange Act. The CFTC Staff encourages SEFs to submit draft filing for innovative contracts before the contract is listed for trading. The Staff accesses the contracts terms and conditions to determine whether or not the contract is susceptible to manipulation. For cash settled contracts the cash settlement price should not be readily susceptible to manipulation and should be reflective of the underlying market for the commodity. Additionally, it should be a reliable indicator of the cash market price and acceptable for hedging.
- TeraExchange Bitcoin Contract: Mr. Leahy noted that TeraExchange had provided a draft filing of its non-deliverable forward bitcoin contract. The CFTC Staff raised questions on TeraExhange’s use of a bitcoin index to price the contract. TeraExchange responded to staff comments by creating a broader based index and back testing the index to ensure the index reflected the price of bitcoin and appropriately screened out outlier prices. The CFTC Staff also raised questions on the monitoring of trading and ability of TeraExchange to obtain information. TeraExchange responded by entering into information sharing agreements with each bitcoin exchange which provided prices for the calculation of the index and by developing a monitoring program. After the staff’s concerns were addressed TeraExhange listed the contract for trading.
Mr. Leonard Nuara, President of TeraExchange then provided additional information on its bitcoin contract including that:
- TeraExchange started working with the CFTC staff in March on their bitcoin contract;
- Retail investors are not permitted on TeraExchange’s platform and therefore cannot purchase the bitcoin contract;
- The first live trade of the bitcoin contract was on October 8, 2014;
- CME is the Swap Data Repository for the bitcoin contract so the trades on the contract will be reported to the CME and then sent to the NFA for their market surveillance program.
Mr. Houman Shadab of New York Law School noted that bitcoin derivatives present three types of regulatory challenges: 1. What is the nature of bitcoin and how do you classify it. 2. How do you apply the traditional distinction between futures and forwards with respect to bitcoin derivatives and 3. How do you regulate derivatives that settle through the block chain.
The discussion also included an overview of the bitcoin market and technological aspects of bitcoin. The bitcoin discussion concluded with a note that the CFTC expected to receive additional applications for bitcoin contracts in the near future.
Good Discussion. Good Day. DR2