House Ag FTX Hearing
House Agriculture Committee
Changing Market Roles: The FTX Proposal and Trends in New Clearinghouse Models
Thursday, May 12, 2022
- FTX CEO Bankman-Fried defended his company’s proposal before the Committee, contrary to testimony by CME CEO Duffy, who argued that allowing the proposal would be catastrophic for the economy and investors. The hearing focused on risk, agricultural markets, and consumer protection.
- Khanna and Duffy had a contentious back and forth regarding the truthfulness of Duffy’s testimony to the Committee.
- Bankman-Fried, contrary to Duffy and in response to questioning by Rep. Plaskett, said the proposal did not require a rulemaking process, nor did it require a House hearing, roundtable, or 60-day public comment period.
- Terrence A. Duffy, Chairman and Chief Executive Officer, CME Group, Chicago, IL
- Sam Bankman-Fried, Chief Executive Officer and Founder, FTX US Derivatives, Chicago, IL
- Walt Lukken, President and Chief Executive Officer, Futures Industry Association, Washington, D.C.
- Christopher Edmonds, Chief Development Officer, Intercontinental Exchange, Atlanta, GA
- Christopher Perkins, President, CoinFund Management LLC, New York, NY
Chairman David Scott (D-Ga.)
In his opening statement, Scott said the FTX proposal could be a serious threat to derivatives markets, emphasized the need to maintain the strength of the U.S. financial system, and cited concerns with the proposal. He further expressed concern for the impact of the proposal on international agreements and the need to protect the sanctity of market clearinghouses.
Ranking Member Glenn ‘GT’ Thompson (R-Pa.)
In his opening statement, Thompson discussed the history, benefits, and criticisms of online trading relative to the derivatives markets and emphasized the need to trust the Commodity Futures Trading Commission’s (CFTC) process in assessing the FTX application.
Mr. Terrence A. Duffy, Chairman and Chief Executive Officer, CME Group, Chicago, IL
In his testimony, Duffy called FTX’s proposal glaringly deficient and said it poses significant risk to market stability and market participants. He added that the implications of the application far exceed the parameters of the typical matters that lay before the CFTC and encouraged the Committee to give the FTX request the fullest measure of scrutiny due to concerns of risk management, market integrity, cross border implications, and customer protection issues.
Mr. Sam Bankman-Fried, Chief Executive Officer and Founder, FTX US Derivatives, Chicago, IL
In his testimony, Bankman-Fried said the CFTC has the tools to be a model regulator for digital assets and emphasized the time and effort spent by the CFTC in digging into FTX’s application. He also expressed respect for the CFTC’s process and whatever conclusions it ultimately comes to on FTX’s application.
Mr. Walt Lukken, President and Chief Executive Officer, Futures Industry Association, Washington, D.C.
In his testimony, Lukken expressed FIA’s support for further analysis and information on the FTX proposal and FTX’s efforts to further advance real-time risk management in clearing and bring greater competition to markets. Lukken highlighted several considerations for the proposal, including risk management and the guiding framework in President Biden’s Executive Order on digital assets.
Mr. Christopher Edmonds, Chief Development Officer, Intercontinental Exchange, Atlanta, GA
In his testimony, Edmonds discussed the risk-reducing benefits of central clearing and significant questions around risk management, financial resources, investor protections and the collection of margin in a retail non-intermediated clearing model raised by the FTX model. He highlighted the significant policy issues and questions about compliance with the PFMIs and Commission regulations raised by FTX’s proposal and the potential for the proposal to undermine the internationally agreed to framework and Commission regulations intended to achieve the goal of a robust and resilient clearing process.
Mr. Christopher Perkins, President, CoinFund Management LLC, New York, NY
In his testimony, Perkins emphasized the need to embrace new technologies, like blockchain, to unlock responsible innovation and inclusion across finance and risk management. He also discussed the need for principles-based, transparent and predictable policy and regulation and said our legacy, intermediated derivative market structure is unprepared to support the risk management realities of this new asset class. He then stated that the FTX proposal promises to bring much needed, responsible innovation to U.S. digital asset derivatives markets. Perkins outlined the benefits of the FTX proposal and acknowledged risks including disclosure and consumer protection issues and excessive speculation. He closed by expressing full support for FTX’s application.
Question & Answer
Scott asked how the FTX proposal makes the market riskier for customers. Duffy said most of the losses in the market are going overseas, which is a good thing for American consumers, and said the proposal is fraught with dangers. Lukken said there is a reason futures commission merchants (FCM) compartmentalize risk away from the central clearing counterparty (CCP) and that diversified risk is a helpful component for preventing systemic risk and protecting customers. Bankman-Fried said the proposal would make derivatives markets less volatile and less risky and that crises can be caused by unlisted contracts with no central clearing. Rep. Alma Adams (D-N.C.) asked if FTX will be expected to show the risks that clearing houses are traditionally responsible for. Lukken said yes and that it is something he likes about the FTX proposal. Rep. Jahana Hayes (D-Conn.) asked how the FTX proposal would eliminate the incentive for participates to mitigate their own risk. Bankman-Fried said CFTC oversight would help address risk and that the FTX model ensures adequate margin for customers’ positions. Rep. Ann Kuster (D-N.H.) asked if moves toward disintermediation create risks similar to those in FTX’s proposal. Duffy said disintermediation is a concern but that he does not lead the charge against disintermediation.
Scott asked how the FTX proposal stands up to international regulatory standards. Edmonds said the application cannot be approved in its current form under the current rules, which is the same concern in the international community. Rep. David Rouzer (R-N.C.) asked how other countries treat authorization of FTX. Bankman-Fried listed multiple countries authorizing FTX’s services but stated that the current proposal is more conservative than the one offered overseas.
Thompson asked why the markets should deviate from the well-tested approach to clearing deployed at CME and ICE for the FTX’s approach. Bankman-Fried advocated for a diversity of suitable and consistent risk-models and said the FTX proposal complies with CFTC rules and has numerous advantages, which he laid out.
Thompson asked what the line is between good and bad regulation. Edmonds said having two standards creates uncertainty in the market and that everyone needs to be able to understand the rules of the game at all times. Rep. Jim Baird (R-Ind.) asked how more digital asset trading in the U.S. would benefit U.S. farmers. Witnesses instead addressed the regulatory issue. Lukken discussed the gap in cryptocurrency regulation, and Edmonds said we do not know what regulator is responsible for which asset. Perkins said we need a thoughtful, robust derivatives regime and that the FTX framework ought to be considered. Bankman-Fried said the offshore activity takes control of the process away from regulators and consumers. Duffy highlighted that markets are global in nature.
Reps. Austin Scott (R-Ga.), Michelle Fischbach (R-Minn.), and Adams asked what would happen if the FTX proposal is applied to agricultural markets and affects farmers. Lukken said this needs further analysis, citing the issue of auto-liquidating agricultural commodities. Edmonds said it would increase the costs of farmers’ operations. Bankman-Fried acknowledged that the proposed model needs further analysis before being applied to different asset classes in different markets and that FTX is not looking to get into that market anytime soon. Rep. Scott DesJarlais (R-Tenn.) asked about the incentives for farmers to enter the market and concerns about whether approval of the proposal would open the door for future use of this model in a broader way. Bankman-Fried said the CFTC is free to approve or not approve other proposed models. Rep. Al Lawson (D-Fla.) asked how the proposal can help disadvantaged farmers. Bankman-Fried said FTX is overrepresented with minority communities on the platform.
Reps. Shontel Brown (D-Ohio), Kim Schrier (D-Wash.), and Adams asked how the FTX proposal accounts for consumer protection. Bankman-Fried said FTX has the typical market protection controls for consumers, regulatory protections, and transparency protections, adding that FTX will have public disclosures of assets listed on the platform and that people need to be aware of what they are trading. He also highlighted existing CFTC regulatory oversight and big print, common language, and quizzes on the FTX platform. Del. Stacey Plaskett (D-V.I.) asked how firms can balance protecting innovation and consumers, including farmers. Perkins said there should be sufficient disclosures and consumer education on trading different asset classes. Hayes asked if the FTX model can help retail investors build wealth or if a lack of backstops will endanger their investments. Duffy said it is hard to tell whether a retail investor will or will not profit. Rep. Tracey Mann (R-Kans.) asked why FTX holdings are safe relative to the risk of the market. Bankman-Fried discussed the collateral health of the FTX model and the conservative nature of the model. Rep. Salud Carbajal (D-Calif.) asked how firms can ensure consumers understand the risks of trading cryptocurrency on margin. Bankman-Fried discussed different aspects of trading in different markets and highlighted transparency features on platforms.
Rep. Ro Khanna (D-Calif.) accused Duffy of making a false statement that FTX has no capital requirements for market participants. Duffy tried to clarify his statement, with pushback from Khanna that he gave false statements in his testimony.
Plaskett asked if Bankman-Fried would be opposed to a CFTC rulemaking, to which he responded that FTX has followed along with the standard CFTC process, that it would not be normal to have a rulemaking as part of a margin order amendment, and that it is also unusual to have a House Committee hearing, roundtable, or public 60-day comment period. Duffy later rebutted that this is a market structure issue that should go through a rulemaking process.
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