FINANCEREGULATION

CME Holds Meeting on FTX's "DeFi Proposal," CBOE and Brokers Defend the Importance of Current Industry Structure

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CME Holds Meeting on FTX

FTX CEO Sam Bankman-Fried, also known as SBF, attended a roundtable meeting at the CFTC to advocate for a decentralized trading system. The 24/7 trading and clearing system without the need for Futures Commission Merchants (FCM) poses a significant threat to the interests of traditional financial institutions. SBF faced strong questioning during the meeting from representatives of CME Group and R.J. O’Brien, a futures commission merchant.

No Intermediary Futures and Options Trading

FTX.US applied to the CFTC in March of this year seeking to offer futures and options contracts without an intermediary. Clearing for trades would not require going through a futures commission merchant (FCM) but instead provide direct access to margin products.

In the CFTC's announcement, FTX proposed using smart contracts to replace FCMs, with FTX.US CEO Brett Harrison acknowledging that smart contracts and FCMs could coexist in the future. CFTC Chairman Rostin Behnam praised the idea, but it has faced strong criticism from various stakeholders.

CME Group Executive Director Sean Downey

Sean Downey referred to the recent Terra collapse and contrasted it with the FTX proposal, emphasizing the industry's ability to handle volatile markets:

The FTX proposal is based on too many assumptions, claiming that algorithms and smart contracts can replace capital. I want to clarify that margin and capital are completely different things. We have seen this scenario before, in fact, we just saw it recently with the algorithmic stablecoin Terra.

FIA: Significant Regulatory Changes Needed in the U.S. Futures Industry

Allison Lurton, General Counsel of the Futures Industry Association (FIA), stated:

Due to the central role of Futures Commission Merchants (FCMs), related regulations are based on law rather than just principles. Many laws and regulations will need to be amended to address non-intermediated trading systems.

She also emphasized that a 24/7 clearing framework already exists but has not been adopted for reasons such as algorithms needing the ability to handle unexpected situations, a responsibility and reason that lies with regulatory bodies.

Futures Broker CEO: This Is a Weapon of Mass Destruction

Gerry Corcoran, CEO of R.J. O’Brien & Associates, stated:

Adopting such a clearing system is a weapon of mass destruction. Relying solely on algorithms without the common human interventions in today's market, severe market fluctuations may exceed the limits set by algorithms, leading to flash crash cycles in the market.

SBF is not alone in this battle. Representatives from the crypto industry, including Coinbase legal counsel Christine Parker, venture capital firm Pantera, CoinFund, and others, were present. SBF summarized his views on Twitter after the meeting.

SBF criticized that FTX.US is a centralized exchange and not all trades are conducted on the blockchain. He questioned why others focus so much on the algorithm of the clearing mechanism, pointing out that FTX uses real-time margin instead of the traditional model where margin can be added based on credit. He stated:

Users have a much deeper understanding of the market than these individuals. Hearing these arrogant views is quite ironic.

He concluded that if FTX's actions can keep these people debating all day, then FTX is doing the right thing.