FTX proposed to the CFTC in March to replace traditional brokers (FCMs) with automatic clearing. In response to this proposal, big names in the commodity futures industry gathered in Congress yesterday to debate. What exactly did they say?
The U.S. House of Representatives Committee on Agriculture held a hearing on "Market Role Change: Trends in Liquidation Models and FTX's Proposal" on May 12, inviting senior executives from the derivatives industry to gather to debate the CFTC proposal proposed by FTX in March. Including the CEO of CME and the CEO of Intercontinental Exchange (ICE) were present to express their opinions.
According to the announcement on the FTX policy website, FTX hopes to require customers to deposit collateral in the account, and the system will use 30 seconds as a time unit to calculate the margin position on a rolling basis. If the margin ratio drops too low, FTX will begin liquidating user positions within seconds.
In response to the proposal, several members of Congress responsible for overseeing the CFTC expressed distrust of the encryption industry at the hearing, and even mentioned the recent chaos caused by UST ( Terra USD).
House Agriculture Committee Chairman David Scott called FTX's proposal "likely to be a serious threat (to the financial system)."
CME CEO: It is a catastrophe for the US economy and investors
Terry Duffy, chief executive of CME, the world's largest derivatives trading platform, believes that if the proposal passes, it will be a disaster for financial markets.
“The risk of using this liquidation model is quite high, the consequences of these products will be a disaster, and this risk is not limited to encrypted commodities, because once the proposal is passed, this model can be used for other commodities.”
Terry Duffy's main concern is that once the proposal is passed, this liquidation model may be applied to other commodities, which increases systemic risk.
Also sympathizing with Terry Duffy are Intercontinental Exchange (ICE) CEO Christopher Edmonds and former CFTC acting chairman Walt Lukken.
Nor are their concerns unfounded.
If this model is only used on FTX and limited to encrypted commodities, then the risk is controllable. Once it is extended to other commodities and other trading platforms, then it will be necessary to consider the liquidation speed and volume of the counterparty.
SBF: Proposal would bring innovation, bring mobility back to US
FTX founder and CEO Sam Bankman-Fried explained that FTX’s proposal reduces systemic risk by requiring traders to provide collateral upfront. From the perspective of risk management, this liquidation method is more conservative than the traditional method, and blockchain technology can liquidate more efficiently.
“We believe (this proposal) will bring competition and innovation, will bring liquidity to the US market, and provide more choices for US users. Our derivatives clearing model in FTX.US is better than anywhere else in the world. Conservative, it reduces systemic risk and strengthens the protection mechanism.”
In response to the concerns of CME and ICE executives, SBF reiterated that it has no plans to launch contracts for "non-digital assets" for the time being.
“We have no plans to use this liquidation model to issue contracts other than digital assets in the short term. I’m not lying, I really mean it.”
In addition, SBF also accepts that there can be additional restrictions, but he does not agree to limit the FTX model to only trading digital asset contracts forever.
It is conceivable that if the proposal is passed, although this liquidation model will only be used for encrypted assets in a short period of time, if this liquidation method is stable in the future, it will also be used for other commodities, and this will also bring new benefits to the U.S. futures market. To compete, all the trading volume of commodity futures is concentrated on CME and ICE.
On the other hand, 95% of the current crypto asset trading liquidity is outside the United States. If this proposal is passed, it will be equivalent to creating a year-round trading environment in the United States, which is a very good strategic consideration for the United States.
CoinFund co-founder Christopher Perkins rallied SBF, arguing that the FTX proposal, if passed, would empower entrepreneurs to create cryptocurrency businesses within the United States, since most innovation now occurs outside the United States.
summary
Both pros and cons have their own insistence and reasons.
Opponents of the FTX proposal believe that technical problems need to be resolved, and if there is a problem, it will affect market operations; the affirmative believes that the FTX proposal has brought innovation, and from the perspective of liquidation risks alone, the FTX proposal is more conservative. More importantly, this encourages innovation and can bring cryptocurrency trading volumes back to the US.
As Rep. Sean Patrick told SBF: "You have a cool idea, and a lot of people are excited about your idea. But they (derivatives people) hate your idea, which should be understandable Well, after all, the idea has had an impact on their business. Let's face it, it's a mess right now."
Overall, FTX's proposal may create a new pattern in the encryption industry, and even in the derivatives industry. At present, the CFTC has not passed the proposal, but will hold a roundtable meeting on the 25th of this month, inviting industry professionals, scholars, and public welfare groups to participate.
Alex
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