The Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight (DMO) and Division of Clearing and Risk (DCR) have issued a joint staff advisory that gives exchanges and clearinghouses registered with the commission guidance for listing virtual currency derivative products.

In 2015, the CFTC found virtual currencies such as bitcoin to be commodities subject to oversight under its authority under the Commodity Exchange Act (CEA). Since then, the commission has taken action against several unregistered bitcoin futures exchanges, enforcing the laws prohibiting wash trading and prearranged trades on a derivatives platform. It has also issued proposed guidance on what is a derivative market and what is a spot market in the virtual currency context, as well as issued warnings about valuations and volatility in spot virtual currency markets, and addressed a virtual currency Ponzi scheme.

The latest guidance is another effort to ensure the CFTC is exercising appropriate oversight, while encouraging innovation and growth in these products, the commission says.

The advisory highlights certain key areas that the CFTC says require particular attention in the context of listing a new virtual currency derivatives contract. They are enhanced market surveillance, close coordination with CFTC staff, large trader reporting, outreach to member and market participants, and Derivatives Clearing Organisation risk management and governance.

“The CFTC staff is committed to providing regulatory clarity as much as possible,” says DMO director Amir Zaidi. “As the virtual currency market continues to evolve, CFTC staff will seek to provide additional guidance to help market participants keep pace with innovation while complying with CFTC regulations.”

DCR director, Brian Bussey, adds, “CFTC staff is providing this information, in part, to aid market participants in their efforts to design risk management programs that address the new risks imposed by virtual currency products. In addition, the guidance is designed to help ensure that market participants follow appropriate governance processes with respect to the launch of these products.”

The advisory provides guidance on certain enhancements when listing a derivatives contract based on virtual currency and clarifies the CFTC staffs’ priorities and expectations in its review of new virtual currency derivatives to be listed on a designated contract market or swap execution facility, or to be cleared by a derivatives clearing organisation.

CFTC says its staff generally believes that the advisory should help exchanges and clearinghouses effectively and efficiently discharge their statutory and self-regulatory responsibilities, while keeping pace with the unique challenges of emerging virtual currency derivatives.

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Colin Lambert

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