On May 25, 2022, the U.S. Commodity Futures Trading Commission
(“CFTC”) conducted a public hearing to consider a request from
LedgerX, LLC, d.b.a. FTX US Derivatives (“FTX”), to amend
its order of registration as a derivatives clearing organization
(“DCO”) to allow direct clearing of listed futures
contracts on Bitcoin and Ethereum and other digital assets by
retail participants. This is a dramatic departure from a
traditional clearing model where retail participants can trade and
clear futures only through professional intermediaries –
registered and heavily-regulated futures commission merchants
(“FCMs”). 

This proposal follows the trend of democratization and
disintermediation in crypto and digital assets markets to allow
broader participation of retail traders, in contrast to
participation by the traditional professional traders and hedgers,
such as farmers, refiners, and financial institutions.  

FTX currently offers clearing of futures
and options on cryptos and other digital assets for retail
participants only on a fully collateralized basis, while the
proposal, if approved by the CFTC, would also allow FTX to clear
margined products on a non-intermediated basis. For margined
contracts (in contrast to fully-collateralized ones), a DCO
collects only a portion of collateral to cover the risks of
possible losses, which increases the risk of default. Normally,
these increased risks are absorbed by the intermediaries –
the FCMs and DCO’s clearing members, albeit at a certain cost
for customers. 

To cover for the increased risks in a disintermediated model,
the proposal includes several innovative features, such as (1)
instantaneous risk management (every 30 seconds) and
marking-to-market of customer futures positions 24/7; (2) posting
of margin to cover open positions (the pay-as-you-go feature); (3)
partial auto-liquidation of positions if collateral on deposit
falls below the maintenance margin level (the go-as-you-pay
feature); (4) full-auto-liquidation of portfolios through backstop
liquidity providers if the value of position drops further below a
threshold; and (5) the funding of FTX guaranty fund as further
security. 

FTX’s proposal raises fundamental questions of how U.S.
derivatives market infrastructure should operate in the future,
because, if approved, the disintermediated model of clearing will
be used for futures on all other assets (such as energy,
agriculture, interest rates, forex) and not only for cryptos. The
CFTC has received numerous comments on the proposal. Regardless of how the CFTC will
ultimately decide on the proposal, it is certain that the
“retailification” and democratization of U.S. derivatives
markets will continue.

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