CFTC Proposes New Rule to Strengthen Customer Protections After FTX Collapse

Last updated: December 14, 2023 01:48 EST
. 2 min read

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The rule, called the “Protection of clearing member funds held by derivatives clearing organizations,” would mandate registered DCOs to establish a clear separation between customer funds, including those from retail investors, and their internal funds. — Source: Pixabay

The Commodity Futures Trading Commission has voted on a proposal to introduce a rule aimed at enhancing safeguards for individuals engaging in trades through a derivatives clearing organization.

The rule, called the “Protection of clearing member funds held by derivatives clearing organizations,” would mandate registered DCOs to establish a clear separation between customer funds, including those from retail investors, and their internal funds.

CFTC Commissioners Summer Mersinger and Christy Goldsmith Romero opposed the vote, whereas CFTC Commissioner Kristin Johnson and CFTC Chair Rostin Behnam supported it. Commissioner Caroline Pham concurred. The next step involves opening the proposal for public comments.

The initiative was partially triggered by the FTX collapse last year which resulted in the compromise of billions of dollars in customer funds, as highlighted during the meeting by Commissioner Johnson.

“One significant motivation, in my humble opinion, for taking the steps that we’re taking today would be the illustration of the bankruptcy and significant risk management corporate governance failures at FTX,” Commissioner Johnson said during the meeting. “They illustrate the magnitude of losses that customers may experience in the absence of regulation that prohibits commingling of customer funds or member property.”

FTX, which was not registered with the CFTC, faced regulatory scrutiny last year when it was revealed that the exchange had commingled customer funds. Last month, FTX’s CEO, Sam Bankman-Fried, was found guilty of misappropriating billions in customer funds.

In his support for the new rule, CFTC Chair Behnam highlighted that while the CFTC has safeguards in place for funds belonging to customers of a futures commissions merchant, such protections do not extend to funds belonging to clearing members of a derivatives clearing organization.

“The proposed rule would ensure that clearing member funds and assets receive proper treatment if a DCO enters bankruptcy by requiring segregation of clearing member funds from the DCO’s own funds and that the funds be held in a depository that acknowledges in writing that the funds belong to clearing members, not the DCO,” Behnam said.

The commission also voted to grant a license to Bitnomial, a crypto derivatives exchange, enabling it to operate as a DCO. This allows the company to clear futures and options trades. In a statement published today, Bitnomial claimed to be the “first and only crypto-native exchange with a full set of U.S. derivatives exchange, clearinghouse, and broker licenses.”

Commissioners Pham, Johnson, and Chair Behnam voted in favor. Commissioner Mersinger voted to concur, while Commissioner Romero voted against the proposal.