Image: CoinDesk

Responding to the fallout from last year's FTX collapse, the U.S. Commodity Futures Trading Commission (CFTC) has initiated a major protective measure in the derivatives trading industry.

The commission's recent vote favours a new proposal, a direct response to safeguard customer interests in an increasingly complex financial market.

This move marks a significant effort to enhance customer security in the volatile world of derivatives trading.

Safeguarding Client Assets

At the heart of this initiative is a proposal that seeks to prevent derivatives clearing organisations (DCOs) from blending customer funds with their own.

This rule, now welcoming public feedback, is designed to create a clear separation between the funds of customers and those of the DCOs themselves.

The aim is to avert scenarios similar to the FTX collapse, where customers faced significant financial losses.

Under this new regulation, customer funds would be insulated from potential risks associated with liquidity crises in DCOs, such as heightened withdrawal demands often seen in crypto exchanges.

CFTC Proposes Rule to Enhance Customer Protection Post-FTX Collapse

Highlighting the proposal's importance, CFTC Chairman Rostin Behnam pointed to the changing dynamics of financial markets, particularly in the realm of cryptocurrencies.

He stressed the need for clear policies and legal frameworks to manage these emerging risks effectively. FTX's dramatic downfall has been a key driving force behind this proposal, with Commissioner Kristin Johnson voicing robust support.

She emphasised the devastating impact on customers when regulatory measures against fund commingling are absent.

Image: Financial News London

A year beyond the FTX debacle, the CFTC has proposed a rule named

"Protection of clearing member funds held by derivatives clearing organisations."

This rule requires DCOs to distinctly separate customer funds, including those from retail investors, from their own operational funds.

The voting saw a mix of opinions among the CFTC commissioners, reflecting the complexity and significance of this regulatory decision.

The rule is especially relevant in the context of recent events involving FTX, which was not registered with the CFTC but faced accusations of misusing customer funds.

CFTC Chair Behnam underscored the current gap in protections for funds belonging to DCO clearing members, explaining that the proposed rule would ensure these funds are treated appropriately in case of a DCO entering bankruptcy.

Diverse Opinions Within the Commission

While the majority of commissioners supported the proposal, some expressed concerns.

Commissioner Summer Mersinger suggested a more detailed review and analysis was needed, while Commissioner Christy Goldsmith Romero raised questions about the rule's implications for actual crypto investors.

Commissioner Caroline Pham, while supporting the proposal, pointed out the extensive existing rules to protect customer funds and stressed the importance of considering changes cautiously.

Image: Wall Street Journal

The Path Forward

The CFTC's proposal, if implemented, would mandate DCOs to establish solid safeguards for customer funds, significantly reducing the risk of large-scale financial losses.

This rule is now open to public discourse, inviting industry experts, stakeholders, and the general public to contribute their insights and concerns.

The CFTC is set to incorporate this feedback into its decision-making process, shaping a more secure and transparent landscape for derivatives trading.