CFTC Releases Letter Addressing Compliance in Three Areas of Digital Asset Derivatives and Clearing

The United States Commodity Futures Trading Commission (CFTC) Issues Letter on Digital Asset Derivatives and Clearing Compliance in 3 Areas

The CFTC has recently issued a staff advisory letter addressing registered derivatives clearing organizations (DCOs) and DCO applicants, emphasizing the risks associated with expanding their activities, particularly in relation to digital assets.

The advisory letter from the CFTC Division of Clearing and Risk (DCR) specifically highlights the need for DCOs and applicants to actively identify and mitigate new, evolving, or unique risks. The DCR states:

“Over the past several years, DCR has observed increased interest in expanding the types of products cleared and business lines, clearing models, and services offered by DCOs, including related to digital assets.”

The DCR further states that it will focus on compliance in three key areas: system safeguards, conflicts of interest, and physical deliveries.

Compliance Areas:

1. System Safeguards: Due to the heightened cyber and operational risks associated with digital assets, DCOs and applicants must pay particular attention to implementing robust system safeguards.
2. Conflicts of Interest: The advisory letter highlights potential conflicts of interest arising from dependencies on affiliated entities or services, such as dual-hatted executives and shared systems and resources.
3. Physical Deliveries: In the technical sense, “physical delivery” refers to the transfer of ownership rights of digital assets between accounts or wallets. The DCR expresses concerns regarding this aspect and its implications.

It is worth noting that the U.S. Securities and Exchange Commission (SEC) has also expressed plans to propose new rules affecting crypto firms serving as custodians of client assets, which aligns with the concerns raised in the CFTC advisory letter.

Alexander Grieve, vice president of Tiger Hill Partners communications firm, highlighted on Twitter that Bitnomial has a DCO application before the CFTC, while LedgerX, recently acquired by MIAX from FTX, is also a CFTC-regulated clearinghouse.