US CFTC issues letter on digital asset derivatives, clearing compliance in 3 areas

The United States Commodity Futures Trading Commission (CFTC) has issued a staff advisory letter to registered derivatives clearing organizations (DCOs) and DCO applicants, reminding them of the risks associated with expanding the scope of their activities. The letter from the CFTC Division of Clearing and Risk (DCR) specifically addressed digital assets.

Staff advisory letters can remind addressees of their legal obligations or provide clarity on those obligations. The “DCR expects DCOs and applicants to actively identify new, evolving, or unique risks and implement risk mitigation measures,” it said, continuing:

“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 said it will emphasize compliance in three areas: system safeguards, conflicts of interest and physical deliveries. Systems safeguards require attention because of the “heightened cyber and other operational risks” associated with digital assets. Potential conflicts of interest were seen in “dependencies on affiliated entities or services (i.e., dual-hatted executives, shared systems and resources, etc.).”

Related: CFTC proposes reducing anonymity to manage risks

“Physical delivery” is used in the letter in its technical sense to mean the transfer of ownership rights — that is, transferring digital assets from one account or wallet to another. This concern, in part, mirrors the U.S. Securities and Exchange Commission’s reported plans to propose a new rule that would impact crypto firms serving as custodians of their clients’ assets. That proposal brought on harsh criticism in the crypto sector.

Today the CFTC’s Division of Clearing and Risk issued a staff advisory on the risks associated with expanding the reach of Derivatives Clearing Organizations (DCO) to clear digital assets. Learn more: https://t.co/9lEPMVXB1W

— CFTC (@CFTC) May 30, 2023

Alexander Grieve, vice president of the Tiger Hill Partners communications firm, noted in a tweet that Bitnomial has a DCO application before the CFTC. LedgerX, recently purchased by MIAX from FTX, is also a CFTC-regulated clearinghouse.

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