The CFTC Market Risk Advisory Committee met to discuss the self-certification process for listing new products on exchanges, particularly with regard to virtual currency futures products (see previous coverage). The meeting included CFTC officials, industry, members, and academics, and featured panels examining: (i) the statutory framework and regulatory process for self-certification of products, (ii) the tools for oversight and risk management of intermediaries and new products, (iii) the self-certification process from the perspective of designated contract markets ("DCMs") and designated clearing organizations ("DCOs"), and (iv) the regulatory, legal, and policy issues related to listing novel products.
CFTC Commissioner Rostin Behnam concluded that the launch of virtual currency futures products as well as other innovations in the derivatives markets exemplify the need for the CFTC to (i) engage with the industry in addressing risk, (ii) provide legal and regulatory certainty to the market, (iii) educate the public, and (iv) challenge the status quo in the CFTC and the market. Commissioner Behnam expressed support for the self-certification process for listing new products, noting that the CFTC is heavily reliant on exchanges to act in the best interest of the markets with respect to surveillance, regulation, and compliance with the CEA. He said that the new CFTC heightened review standard works within the self-certification process to apply additional scrutiny to virtual currency futures products, but argued that the necessity of such a measure indicates that the CFTC should reconsider its traditional regulatory approach to new products.
Chair J. Christopher Giancarlo expressed general support for the self-certification process, but said that it should be evaluated and analyzed for potential improvements. He highlighted his recent request to add an extra step to the review and compliance checklist for virtual currency product self-certifications, requiring exchanges to disclose efforts that they have undertaken to collect and evaluate input from interested parties. Chair Giancarlo emphasized the importance of assessing the level of responsibility of DCMs to ensure that virtual currency derivatives are not vulnerable to manipulation, and of DCOs to ensure that such products are sufficiently margined.
Commissioner Brian Quintenz explained that the self-certification process is only the first step for many new products, and that regulatory oversight continues by both the CFTC and exchanges. He encouraged discussion of how exchanges evaluate risk with regard to listing a new product, risk management processes for both exchanges and clearinghouses, and how exchanges determine whether a cash market has the requisite transparency and liquidity to support accurate and fair pricing for related derivatives products.
Commentary / BobZwirb
It is ironic that the self-certification process for approval of new financial products, a creature of the Commodity Futures Modernization Act of 2000 ("CFMA"), is undergoing regulatory scrutiny now, rather than in the recent past when so much of the regulatory framework created by the CFMA was dismantled and replaced by Dodd-Frank. It is not surprising, however, given the challenges posed by virtual currency today.
The formal statements issued by the three sitting members of the Commission before the MRAC meeting reflect a diverse range of views and potential divide on this issue. On one end is Commissioner Behnam, who appears to favor "heightened review" for new products, especially virtual currency derivatives, arguing that "the self-certification process may not be an appropriate regulatory tool for all new products." At the other end is Commissioner Quintenz, who reminds us that self-certification can play "an important role" in "ensur[ing] that the market's introduction of new products is not delayed by regulators' political considerations." In between is Chair Giancarlo, who declares that he is "neither an apologist nor an opponent of the current process of self-certification," but says that an "additional element" of regulatory review is necessary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
