On June 5, 2023, the Commodity Futures Trading Commission (CFTC) issued an order authorizing CBOE Clear Digital, LLC (“CBOE Clear”), a registered derivatives clearing organization (DCO), to clear margined digital asset futures contracts. Concurrent with the June 5th order, CFTC Commissioner Christy Goldsmith Romero issued a supporting statement in respect of the order. This blog post provides an overview of the terms and conditions of the CFTC’s June 5th order, particularly in light of certain of Commissioner Goldsmith Romero’s comments, following a brief outline of the administrative history related to CBOE Clear’s digital asset product line-up.
Administrative History of CBOE Clear’s Digital Asset Authorizations
The June 5th CFTC order was one in a series of orders beginning with a 2019 order in which the CFTC granted CBOE Clear (then named Eris Clearing, LLC) registration as a DCO for the clearing of fully collateralized digital asset futures.
In 2020, the CFTC amended its initial order to permit CBOE Clear to clear fully collateralized futures and fully collateralized swaps without the requirement that they pertain to digital assets.
In 2022, the CFTC expanded the scope of CBOE Clear’s authorizations, allowing the DCO to clear futures, both fully collateralized and on a margined basis, as well as fully collateralized swaps.
It is against this backdrop of administrative history that the June 5th order rests, whereby the CFTC permitted CBOE Clear to clear margined digital asset futures contracts subject to the terms and conditions of that order, as next summarized, as well as the fully collateralized swaps and fully collateralized futures contracts previously authorized.
An Overview of the June 5th Order
The June 5th order authorized CBOE Clear to clear margined digital asset futures for futures commission merchants (FCM) only. Effectively, this limitation requires CBOE Clear to operate its margined digital asset futures business within the parameters of the traditional FCM-intermediated market, instead of a disintermediated, direct-to-customer market that has been explored for use by other market participants.
Concurrent with the June 5th order, CFTC Commissioner Christy Goldsmith Romero issued a supporting statement explaining that, when reviewing CBOE’s request to clear digital asset futures on a margined basis, she was particularly concerned with ensuring that CBOE had adequate risk-mitigation measures in place. Commissioner Goldsmith Romero indicated that the terms and conditions of the June 5th order addressed her concerns.
The following is a summary of the key terms and conditions of the June 5th order:
- Funds of CBOE Clear’s clearing members will be separate and distinct from CBOE Clear’s own funds, with the FCM’s funds held in Member Property Accounts (as defined in CBOE Clear’s rulebook) treated as member property for purposes of the U.S. Bankruptcy Code.
- CBOE Clear will obtain and maintain insurance to cover theft or loss of participant’s digital asset collateral.
- CBOE Clear will provide “plain English” digital asset risk disclosures to its FCM clearing members, including the risk of theft, loss, or hacking of underlying digital assets.
- An independent certified public accounting firm will be required to audit CBOE Clear’s digital asset balances and provide an annual opinion on the accounting treatment of CBOE Clear’s digital asset balances.
- CBOE Clear will obtain and provide to the CFTC’s Division of Clearing Risk a copy of System and Organization Controls (SOC) audit reports for itself and any third-party service provider used in the custody or storage of any digital assets held on behalf of CBOE Clear’s FCM clearing members.
- CBOE Clear will comply with heightened financial information due diligence and collection requirements (for example, certain anti-money laundering obligations) that apply to certain financial institutions (i.e., “covered financial institutions”)
In addition, working with Commissioner Goldsmith Romero’s office, CBOE Clear agreed to amend its rulebook to disqualify any FCM from clearing membership if it, or any affiliate or any associated principal of the FCM, has been disqualified under Section 8a(2) of the Commodity Exchange Act. As explained in Commissioner Goldsmith Romero’s supporting statement, “In other words, [CBOE Clear] will not admit any clearing firm that has been found to have violated a provision of law identified by Congress as significant enough to prohibit a firm – without a hearing – from engaging in a CFTC-regulated business.”
The CFTC issued the June 5th order shortly after the staff of the CFTC’s Division of Clearing and Risks released the CFTC Staff Advisory No. 23-07 to address the supervision of heightened risks associated with the expansion of clearing into the digital-asset space. The advisory identified cyber resilience, systems safeguards, conflicts of interest, and physical settlement risks as key areas of concern.