U.S. derivatives regulator tightens review for virtual currencies; defends 'self-certification' rules

NEW YORK (Thomson Reuters Regulatory Intelligence) - The top U.S. derivatives regulator last week announced stricter protocols for how virtual-currency derivatives come to market while also defending the ability for major exchanges to introduce new products through their own “self-certification” process.

Christopher Giancarlo waits to testify on his nomination to be chairman of the Commodity Futures Trading Commission (CFTC) before the Senate Agriculture Nutrition and Forestry Committee on Capitol Hill in Washington, U.S., June 22, 2017.

J. Christopher Giancarlo, chair of the Commodity Futures Trading Commission (CFTC), said in a speech(here) that he has asked his staff to develop a “heightened review” process for virtual currencies such as bitcoin futures, and put forward an eight-point checklist for regulators to follow when exchanges plan to launch a new product.

“In crafting its process of ‘heightened review’ for compliance with core principles, CFTC staff prioritized visibility and monitoring of markets for bitcoin derivatives and underlying settlement reference rates,” said Mr. Giancarlo at an industry conference in Florida.

The new checklist includes enhanced information-sharing agreements between exchanges and the CFTC, as well as agreements between exchanges to coordinate product launches. While the agency used an existing seven-point checklist in its review of bitcoin futures, which were introduced in December by several major U.S. exchanges, Giancarlo added an eighth item that regulators would include going forward.

“For all reviews of new virtual currency derivatives, Designated Contract Markets (DCM) and Swaps Execution Facilities (SEF) will be asked to disclose to the CFTC what steps they have taken in their capacity as self-regulatory organizations to gather and accommodate appropriate input from concerned parties, including trading firms and FCMs (futures commission merchants),” said Giancarlo.

“Further, I have asked staff to take a close look at Derivatives Clearing Organizations (DCO) governance around the clearing of new products and to consider recommendations for possible further action,” he added.


Giancarlo’s remarks come in the face of sharp criticism over the CFTC’s handling of the launch of bitcoin futures in December by the CME Group and the Cboe Global Markets. Some industry participants, including the Futures Industry Association, said they were not adequately consulted over the product launch, and that the agency had rushed through the approval process by allowing the exchanges to “self-certify” the futures products.

Giancarlo pushed back on criticism that the agency could have done more to slow the approval process, and defended the “self-certification” regime. Labeling himself “neither an apologist nor opponent” of the self-certification rules, Giancarlo said the real issues are whether a DCM’s responsibility under the Commodity Exchange Act and current regulations to ensure that “virtual currency derivatives are not readily susceptible to manipulation is sufficiently robust given the nascent state of this emerging asset class.”

A further issue was whether a DCO “has fulfilled its responsibility under the CEA and Commission regulations to ensure that virtual currency derivatives are sufficiently margined.”

At the launch of the bitcoin futures products in December, margin requirements by the CME Group and Cboe Global Markets were 35 and 40 percent, respectively, substantially above the requirements for most products.

Giancarlo also noted the important role the “self-certification” process plays in fostering market innovation, a key objective of the U.S. Congress when they first approved the rules.

“Congress framed the self-certification process deliberately so that development of new and innovative derivatives products would not be hampered by cautious regulators conscious of the political risks of approving new products. The CFTC’s current product self-certification framework is consistent with public policy that encourages market-driven innovation,” Giancarlo said.

“The CFTC’s current product self-certification framework is consistent with public policy that encourages market-driven innovation that has made America’s listed futures markets the envy of the world,” he said, adding, “whatever the market impact of bitcoin futures, I hope it is not to compromise the product self-certification process that has served so well for so long.”

The CFTC held an advisory committee meeting on the self-certification process earlier today, chaired by Commissioner Russ Behnam.

In the past several days the CFTC has filed a series of civil enforcement actions against those alleged to have engaged in fraud and market abuse in bitcoin products. Giancarlo underscored the determination of the CFTC, working closely with the Securities and Exchange Commission, to “aggressively prosecute those who engage in fraud and manipulation of U.S. markets for virtual currency.”

(Henry Engler is a North American Regulatory Intelligence Editor for Thomson Reuters Regulatory Intelligence. He is a former financial industry compliance consultant and executive, and earlier served as a financial journalist with Reuters. Email Henry at