Changing Market Roles: The FTX Proposal and Trends in New Clearinghouse Models (U.S. House Committee on Agriculture)

Hearing	Changing Market Roles: The FTX Proposal and Trends in New Clearinghouse Models
Committee	U.S. House Committee on Agriculture
Date	May 12, 2022

 

Hearing Takeaways:

• FTX’s Proposal to Offer Direct Clearing: The hearing focused on FTX’s current application with the U.S. Commodity Futures Trading Commission (CFTC) to offer direct clearing for margined futures contracts. FTX’s proposal would be novel in that it would depart from existing rules requiring the use of futures commission merchants (FCMs), which served as intermediaries to trade and clear derivatives. Mr. Bankman-Fried stated that each of the FTX proposal’s elements were already present in CFTC-licensed derivatives exchanges. The CFTC is currently considering the proposal, has solicited public comments on the proposal, and is scheduled to hold a public roundtable to consider the application in late May 2022.
  • Digital Asset Oversight Features of the FTX Model: Mr. Bankman-Fried noted how there was currently no federal oversight of cryptocurrency markets. He stated that having federally licensed cryptocurrency derivatives exchanges would help to ensure that these exchanges met safety standards. Mr. Edmonds warned however that FTX’s proposal could undermine regulatory certainty for consumers through imposing multiple regulatory standards for exchanges.
  • Transparency and Disclosure Features of the FTX Proposal: Mr. Bankman-Fried testified that FTX provided market data that was free, transparent, and public and indicated that all users, regulators, and other observers had access to this data. He stated that the status quo of gated market data led to higher operational costs and often advantaged larger traders that could afford to pay for this data. He lastly stated that providing free access to market data would support cryptocurrency innovation. Mr. Duffy defended CME Group’s choice to charge for market data access and commented that these fees covered the cost and time associated with accumulating the data.
  • Fair Access Features of the FTX Proposal: Mr. Bankman-Fried stated that traditional exchanges had separate models for their largest traders and other users such that only the largest traders have direct access with lower latency fees and more options. He testified that FTX would empower all users to choose their most preferred method of access to their platform. Mr. Perkins stated that FCMs often gave their top clients preferred access due to capacity constraints.
  • Concerns about Auto-Liquidation: There was significant debate surrounding the FTX’s proposed use of an auto-liquidator to wind down the positions of customers that were at or near default. Mr. Bankman-Fried argued that this auto-liquidator would enable FTX to avoid premature liquidations of positions, which would guard against systemic risk. Mr. Duffy and Mr. Lukken expressed concerns however that an auto-liquidator could create a self-reinforcing cycle in which defaults caused sell offs, which in turn caused more defaults. Mr. Lukken suggested that intermediaries (such as FCMs) could help to manage troubled positions and avoid unnecessary selloffs through extending credit when appropriate. Mr. Duffy also cautioned that the auto-liquidator in the FTX proposal would need to run 24/7, which would make market participants in traditional commodities always vulnerable to having their positions liquidated.
  • Concerns about the Applicability of the FTX Proposal to Commodities Beyond Digital Assets: Another key area of concern during the hearing was whether the FTX proposal would be applied to non-digital asset commodities (such as agriculture commodities). Mr. Bankman-Fried testified that FTX did not have any plans to apply their proposed risk model to non-digital asset contracts “any time soon” and expressed FTX’s willingness to formally commit to this promise. Rep. Rodney Davis (R-IL) and Mr. Duffy raised concerns that the CFTC’s approval of the FTX proposal would make the proposal’s framework applicable to all asset classes (rather than just digital assets). Mr. Duffy remarked that his exchange would effectively be forced to adopt the FTX model for all commodities if the models were approved given that this new model would be significantly cheaper than the status quo.
  • Impact on Collateral Backing Derivatives Trades: The hearing’s witnesses debated the FTX proposal’s collateral requirements and their impacts on markets. Mr. Duffy and Mr. Edmonds raised concerns that the FTX proposal would significantly increase market risk by potentially removing up to $170 billion in loss absorbing capital from the cleared derivatives markets, eliminating standard credit due diligence practices, and removing pre-funding requirements. Mr. Bankman-Fried and Mr. Perkins contended that collateralization approaches for current futures markets were ill-suited for 24/7 cryptocurrency markets. They asserted that the model’s reliance on collateral that was pre-funded at a clearinghouse would help to guard against defaults. Mr. Bankman-Fried asserted that this approach would ensure that this capital would have CFTC oversight and be held in segregated accounts (which provides a capital backstop for the customer)
  • Impact on FCMs: Rep. Jahana Hayes (D-CT) and Mr. Lukken raised concerns over the FTX proposal’s potential impact on intermediaries. Mr. Lukken remarked that FCMs protect the funds of customers through ensuring that customer funds were segregated, guaranteeing customer funds, and holding capital against customer funds. He noted that FTX was arguing that they could replicate these customer protections in other ways as part of their derivatives clearing organization (DCO) application. He stated that FTX was seeking to combine many of these functions, which could lead to conflicts of interest. Rep. Hayes expressed concerns that the removal of intermediaries could create an opening for fraud and abuse (particularly for new customers that were entering the digital asset market for the first time). Mr. Bankman-Fried stated that the FTX proposal would permit trading firms to send their FTX orders through an FCM. He also indicated that FTX’s proposed model would allow intermediaries and FCMs to maintain bespoke arrangements with their clients that would involve higher margin requirements.
  • Impact on the U.S.’s International Equivalence Agreements: Full Committee Chairman David Scott (D-GA), Mr. Duffy, and Mr. Edmonds all expressed concerns about the potential for the FTX proposal to upset international agreements that have deemed the U.S.’s current clearing structure and regulations equivalent to European Union (EU) and United Kingdom (UK) rules. 
  • Stress Testing of FTX’s Model: Mr. Lukken contended that there needed to occur further analysis of FTX’s risk model in “extreme but plausible” scenarios, especially for large commercial participants in other asset classes beyond retail cryptocurrencies. He noted how this risk model relied upon continuous liquid markets that were open 24/7, which raised questions about the market impact of an auto-liquidation feature for the closeout of large positions in less liquid markets. He further commented that it was difficult to determine whether FTX’s capital reserve holdings were sufficient. He noted how FTX’s largest clients were significantly smaller than a traditional FCM’s largest clients, which made it difficult to apply traditional stress tests to the FTX proposal. Mr. Bankman-Fried predicted that the top three users of the FTX exchange in the U.S. would be very large based on FTX’s experience in foreign jurisdictions. He asserted that this would make traditional stress tests applicable to the FTX proposal. He also stated that the amount of money that FTX was putting in its guarantee fund was “way above” what would be required based on traditional stress tests.
  • The Committee’s Role in Overseeing CFTC Consideration of the FTX Proposal: Full Committee Ranking Member Glenn “GT” Thompson (R-PA) remarked that the Committee should not duplicate the CFTC’s work and that the Committee ought to instead trust the CFTC’s process for considering the FTX proposal. He stated that the Committee should only intervene on the FTX proposal if the CFTC were to fail to appropriately consider the proposal or deviate from the law in its consideration of the proposal. He asserted however that these conditions for Committee intervention on the FTX proposal had not been met. Mr. Bankman-Fried contended that the U.S.’s review of FTX’s application had involved heightened levels of transparency and thoroughness. He stated that it was unusual to have rulemaking as part of a margin order amendment application. He further called it unusual to have a Congressional hearing, public roundtable, and 60-day comment period on a margin order amendment application.
• Other Digital Asset Issues: In addition to the FTX proposal, Committee Members and the hearing’s witnesses expressed interest in the other policy issues related to FTX and digital assets.
  • Consumer Education About Digital Assets: Subcommittee Democrats expressed interest in ensuring that consumers were sufficiently educated about the risks associated with digital assets trading. Mr. Bankman-Fried noted how FTX users were required to go through a walkthrough of the FTX US Derivatives platform that explained how everything worked. He also indicated that smaller users would need to complete a test to prove their knowledge about these products. He stated that these measures were in addition to FTX making its entire rulebook and all of its market data publicly available. He further testified that FTX was looking to create template registration statements for the assets they would list. He indicated that FTX would work with the CFTC to determine suitable assets to list.
  • U.S. Competitiveness in the Global Digital Assets Market: Committee Members and Mr. Bankman-Fried highlighted how 95 percent of digital asset volume was currently being traded overseas. Committee Members and the hearing’s witnesses were divided on how to deal with this situation. Some Committee Members, Mr. Bankman-Fried, Mr. Edmonds, and Mr. Lukken contended that the U.S. needed a clearer regulatory structure for digital assets in order to bring this activity to the U.S. Mr. Bankman-Fried cautioned that this dynamic could result in foreign currencies becoming the base currencies for the world’s cryptocurrency ecosystem. Rep. Austin Scott (R-GA) and Mr. Duffy expressed indifference as to whether most of the cryptocurrency trading was occurring aboard. Mr. Duffy speculated that most cryptocurrency market participants were retail participants and suggested that it was not imperative for the U.S. to be the global leader in cryptocurrency trading activity.
  • Environmental Impact of Cryptocurrencies: Rep. Abigail Spanberger (D-VA) expressed interest in the environmental impacts of cryptocurrencies. She indicated that roughly 35 percent of all Bitcoin mining took place within the U.S. and that this mining translated into roughly 40 billion tons in carbon dioxide emissions in 2021. Mr. Bankman-Fried predicted that energy usage would not scale linearly with the cryptocurrency industry’s growth because most blockchains were proof of stake blockchains, which use very little energy. He stated that most cryptocurrency transactions were already occurring on proof of stake blockchains. He predicted that proof of stake blockchains would be the blockchains that would become popular for transactions for economic and environmental reasons.

Hearing Witnesses:

1. Mr. Terrence A. Duffy, Chairman and Chief Executive Officer, CME Group
2. Mr. Sam Bankman-Fried, Chief Executive Officer and Founder, FTX US Derivatives
3. Mr. Walt Lukken, President and Chief Executive Officer, Futures Industry Association
4. Mr. Christopher Edmonds, Chief Development Officer, Intercontinental Exchange
5. Mr. Christopher Perkins, President, CoinFund Management LLC

Member Opening Statements:

Full Committee Chairman David Scott (D-GA):

• He remarked that cryptocurrencies could threaten the U.S.’s derivatives markets and cross-border dealings and asserted that the Committee must work to maintain the global supremacy of the U.S. financial system.
• He stated that the hearing would focus on the merits and suitability of FTX’s proposed clearing model.
  • He noted that this proposal would have margin products be traded under a non-intermediated clearing model and commented that the model would therefore require closer public examination.
• He mentioned how he had heard numerous concerns regarding the risks and threats of FTX’s proposed clearing model and contended that the Committee must work to preserve and protect the U.S. financial system.
• He recounted how CFTC Chairman Rostin Behnam had indicated that the CFTC would offer an opportunity for “robust” public input on FTX’s proposed clearing model.
  • He asserted that this proposal must receive full consideration given its implications for the orderly clearing of derivatives trades.
• He noted that while FTX’s proposed clearing model was limited to a select number of cryptocurrency contracts, he stated that the Committee must consider the potential of this model to impact other derivatives markets.
  • He also suggested that other clearinghouses might adopt this model in the future.
• He further expressed concerns about the potential for the FTX proposal to upset international agreements that have deemed the U.S.’s current clearing structure and regulations equivalent to EU and UK rules.
  • He explained that these agreements provided U.S. DCOs the ability to provide clearing services in the EU and the UK markets.
• He recounted how the Committee had previously fought back against the EU’s efforts to regulate U.S. clearinghouses and reiterated his concerns that the FTX proposal could undermine this work.

Full Committee Ranking Member Glenn “GT” Thompson (R-PA):

• He discussed how U.S. commodities and futures markets were fully computerized and stated that this computerization supported deeper liquidity, narrower spreads, faster transaction times, and more hedging opportunities.
  • He commented that this electronic trading provided greater access to all market participants.
• He noted however that a small number of market participants still viewed electronic markets as more volatile and less reliable than human-intermediated markets.
• He then mentioned how CME Group had recently announced that it would move its markets to the cloud and stated that a cloud-based market infrastructure could have both benefits and drawbacks.
  • He commented that this cloud-based market infrastructure could create fairer access and reduce costs for participants.
• He noted how the current hearing would focus on FTX’s recent proposal to have their non-intermediated clearinghouse offer margin products.
• He recounted how CFTC Chairman Rostin Behnam had recently stated that the CFTC would publicly consider the FTX proposal based on the core principles for DCOs.
  • He also mentioned how the CFTC had a public comment period for the FTX proposal (which closed yesterday) and will hold a public roundtable on the proposal later in the month.
• He remarked that the Committee should not duplicate the CFTC’s work and that the Committee ought to instead trust the CFTC’s process for considering the FTX proposal.
• He contended that the Committee should only intervene on the FTX proposal if the CFTC were to fail to appropriately consider the proposal or deviate from the law in its consideration of the proposal.
  • He stated that these conditions for Committee intervention on the FTX proposal had not been met.
• He then expressed interest in learning about changing market structures and the ever-evolving impact of technology on markets.
  • He expressed particular interest in learning about how technology could empower market participants through reducing costs and improving access and protect financial markets through increasing transparency and reducing systemic risk.

Witness Opening Statements:

Mr. Terrence A. Duffy (CME Group):

• He discussed how his company, CME Group, was the world’s leading derivatives marketplace and noted how CME Group offered futures and options contracts across every investable asset class.
• He contended that FTX was proposing a “risk management-light” clearing regime that would inject “significant” systemic risk into the U.S. financial system.
  • He commented that FTX was making this proposal under the guise of innovation and asserted that FTX was instead pursuing this proposal to cut costs.
• He stated that FTX’s proposal would come at the expense of proven risk mitigation practices, market integrity, and financial stability.
• He remarked that the FTX proposal would significantly increase market risk by potentially removing up to $170 billion in loss absorbing capital from the cleared derivatives markets and eliminating standard credit due diligence practices.
  • He further asserted that this proposal would destroy risk management incentives through eliminating stakeholder capital requirements and mutualized risk.
• He stated that FTX’s proposal to instantaneously auto-liquidate any customer who is under margin at any given moment in time would jeopardize both market integrity and financial stability.
  • He expressed concerns that auto-liquidation could exacerbate volatility and create “dramatic” price moves during times of turbulence.
  • He commented that auto-liquidations could lead to a repeated pattern of price declines followed by additional liquidations during an already stressed market.
• He also remarked that FTX’s market maker and backstop liquidity provider plans imported from its offshore practices in low-regulatory jurisdictions raised “serious” questions about the potential conflicts of interest embedded in the FTX model.
• He further stated that FTX’s proposal would cause market participants to lose important customer segregation protections and potentially expose these market participants to increased collateral investment losses.
  • He highlighted how the proposal would permit non-defaulting customer positions to be terminated or liquidated for collateral for any reason and under any market conditions.
• He noted that U.S. clearinghouses (such as CME Clearing) by contrast have billions of dollars in resources available in a default waterfall that must be used to cover losses prior to any possibility of a position tear-up.
• He remarked that the CFTC must determine that the FTX proposal would comply with the core principles for designated contract markets (DCMs) and was in the public’s best interest.
• He asserted that the CFTC could not credibly make such a determination or even legally limit its approval to just cryptocurrencies on a test basis.
  • He stated that limited CFTC approval of the FTX proposal for cryptocurrency markets would not prevent FTX or other DCMs from expanding into other asset classes.
• He contended that the CFTC ought to either reject the FTX proposal or commence a formal rulemaking to allow for a broader public discussion of appropriate risk management standards.
• He lastly discussed how the Committee had previously worked to defend the CFTC’s standards and regulatory oversight as equivalent to or superior to any other jurisdiction in the world.
  • He asserted that the CFTC’s approval of the FTX proposal would jeopardize these cross-border equivalence agreements.
• He stated that exempting FTX from well-established U.S. clearing rules could undermine confidence in the U.S.’s regulatory regime for derivatives.

Mr. Sam Bankman-Fried (FTX US Derivatives):

• He mentioned how his company, FTX, had acquired CFTC-licensed clearinghouse and marketplace LedgerX in 2021.
  • He indicated that LedgerX was rebranded as FTX US Derivatives following the 2021 acquisition.
• He recounted how FTX had submitted an amendment to their clearing order in 2021 that seeks to allow for FTX US Derivatives to operate with margin.
  • He testified that FTX had spent tens of thousands of hours in conversation with the CFTC about this proposal and had submitted thousands of pages of documents to the CFTC regarding the proposal.
• He indicated that FTX would respect the CFTC, their process, and their ultimate conclusions.
• He acknowledged that while the FTX proposal would combine various elements together (which he asserted would lead to innovation), he asserted that each of the proposal’s elements were already present in CFTC-licensed derivatives exchanges.
• He remarked that FTX’s proposal would promote fair and equitable access to platforms and highlighted how traditional exchanges charged for market data.
  • He commented that this practice resulted in informational advantages for the largest traders.
• He testified that all of FTX’s market data was free, transparent, and public and indicated that all users, regulators, and other observers had access to this data.
• He also stated that traditional exchanges had separate models for their largest traders and other users such that only the largest traders have direct access with lower latency fees and more options.
  • He remarked that FTX would empower all users to choose their most preferred method of access to their platform.
• He asserted that FTX’s proposed model would have helped to alleviate the recent challenges associated with futures exchanges, including the 2022 London Metal Exchange (LME) nickel fiasco.
  • He commented that FTX’s proposed model would have alleviated these issues through having collateral pre-funded at the clearinghouse (rather than relying on credit) and having a real-time risk engine.
• He also stated that FTX maintained all of the customer protections that existed on both traditional exchanges and on FCMs.
• He lastly remarked that FTX’s proposal would result in increased liquidity to the U.S. marketplace, increased competition in the futures market (which was currently dominated by two exchanges), and a stronger U.S. position within the global digital assets space.
  • He highlighted how 95 percent of digital asset volume was currently being traded overseas.

Mr. Walt Lukken (Futures Industry Association):

• He discussed how the CFTC was currently considering a proposal from FTX that would replace the traditional clearing model that distributes risk using FCMs with a more automated and centralized model.
  • He stated that the FTX proposal would combine margin futures with near real-time margining, 24/7 auto-liquidation of under margined customers, and a self-funded central counterparty (CCP) default fund without the benefits of FCMs managing, underwriting, and mutualizing customer risk.
• He highlighted how this proposal would permit futures trading in any underlying asset class transacted by any type of customer (including commercial hedgers).
  • He asserted that the U.S. must therefore consider more than just retail cryptocurrencies when reviewing this proposal given the proposal’s potential impact.
  • He also stated that the CFTC must consider how this proposal would impact the core users of futures markets, including farmers, refiners, pension funds, and other “main street businesses.”
• He called on policymakers to consider the fundamental guiding framework that was articulated in President Biden’s recent Executive Order (EO) on Ensuring Responsible Development of Digital Assets.
  • He noted that this framework would have the same rules be applied to similar businesses with similar risks.
• He stated that the CFTC must analyze FTX’s proposal against the important customer protections and risk management functions that registered FCMs currently provide the marketplace.
• He discussed how FCMs served as agents for their customers and had numerous regulatory responsibilities.
  • He indicated that these responsibilities included vetting customers on the appropriateness of leveraged products, policing clients for money laundering, segregating customer funds, guaranteeing customer trades, holding significant regulatory capital against those trades, contributing to clearinghouse default funds, and agreeing to further assessments should the CCP default fund need replenishment.
• He noted how U.S. registered FCMs currently contribute more than $15 billion to CCP default funds and hold an additional $175 billion in their own regulatory capital.
  • He commented that this layer of financial resources backstops the potential default of customers and protects the markets (as well as the wider financial system) from a contagion event.
• He contended that there needed to occur further analysis of FTX’s risk model in “extreme but plausible” scenarios, especially for large commercial participants in other asset classes beyond retail cryptocurrencies.
• He noted how FTX’s risk model relied upon continuous liquid markets that were open 24/7, which raised questions about the market impact of an auto-liquidation feature for the closeout of large positions in less liquid markets.
  • He stated that the U.S. must ensure that FTX’s risk model did not trigger a broader fire sale in the central price discovery market that would harm hedgers and cause further market disruption.
• He concluded that further analysis and information regarding the FTX proposal were needed and commented that the CFTC’s deliberative process would help to bring additional clarity and information to this model.

Mr. Christopher Edmonds (Intercontinental Exchange):

• He remarked that the adoption of new technologies and processes in capital and derivatives markets could provide benefits and pose risks.
  • He asserted however that innovation could not supersede the primary function of futures markets for price discovery and hedging.
• He discussed how the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) had provided a system in which separately capitalized, governed, and regulated clearing organizations managed the settlements of financial transactions executed by market participants.
  • He indicated that these transactions were typically executed via regulated clearing members.
• He stated that all of these parties served as important checks in the system against excessive leverage, new and untested products, and the introduction of unexpected counterparty risk.
  • He commented that these participants helped to deliver market consensus.
• He remarked that regulated clearinghouses working in conjunction with regulated exchanges and (in most cases) market intermediaries supported increased stakeholder confidence in fair markets, transparent pricing, and fully understood settlement processes.
• He then noted how FTX played a leading role in the market for digital assets and asserted that regulatory oversight would lead to balanced decision making and risk management practices.
• He expressed the concerns of his company, Intercontinental Exchange (ICE), regarding FTX’s proposed approach and warned that this proposal could create a dangerous precedent.
  • He asserted that this proposal raised “significant” questions around risk management, financial resources, investor protections, and the collection and safeguarding of margin on a non-intermediated clearing model.
• He recommended that the Committee explore the FTX proposal’s potential risks and market implications.
• He described the current regulatory system for clearinghouses as a “pay as you go system” and asserted that the FTX proposal would instead be a “go as you pay service.”
  • He stated that market participants would automatically lose their positions under the FTX proposal if the market were to turn against them.
  • He indicated that these market participants would not be able to bolster their stakes with additional margin.
• He lastly warned that CFTC approval of the FTX proposal in its current form may lead foreign jurisdictions to challenge the CFTC’s pragmatic and principle-based approach.

Mr. Christopher Perkins (CoinFund Management LLC):

• He remarked that the cultivation of deep, liquid, accessible, and secure derivatives markets was an important cornerstone of the U.S. economy and an essential pillar of effective risk management.
• He stated that the arrival of Web 3 could potentially transform the global economy into a more creator-led, open, inclusive, and democratic ecosystem.
  • He commented that principles-based, predictable, and transparent policy and regulation would empower entrepreneurs to build and innovate their Web 3 businesses within the U.S.
• He asserted that the risk management realities and challenges associated with digital asset markets that function 24/7 have already arrived.
  • He mentioned how an NBC News poll had found that 20 percent of Americans had either invested in, traded in, or used cryptocurrencies.
• He stated that the emerging cryptocurrency market was very inclusive and highlighted how communities of color were leading cryptocurrency user adoption.
• He noted that while Americans could legally take risks through exposing themselves to a vast array of spot digital assets, he indicated that the ability of Americans to hedge this risk through the derivatives market was “extremely limited.”
  • He contended that the legacy intermediated derivatives market structure was unprepared to support the risk management realities of digital assets.
• He remarked that FTX’s proposal to provide direct access to derivatives clearing powered by real-time risk and collateralization engines could bring much needed innovation to U.S. digital asset derivative markets.
  • He asserted that the FTX proposal would reduce systemic risk through real-time collateralization and risk management, offer industry participants the ability to hedge digital asset risk more dynamically, introduce incremental competition and choice, and revitalize U.S. digital asset derivative markets.
• He stated that any proposed model must prove that it can meet or exceed the same “extreme but plausible” stress scenarios applied to legacy clearinghouses via existing regulations.
  • He contended that appropriate disclosures were needed to ensure that industry participants understand the unique nuances and risks associated with participating in a direct clearing model (including the risk of liquidation).
• He also remarked that regulators should continue to consider guardrails to dissuade “excessive” speculation.
• He concluded his opening statement by expressing support for FTX’s application to offer a direct clearing model for digital asset derivatives.
  • He commented that this approach would foster a more inclusive and liquid U.S. derivatives market.

Congressional Question Period:

 Full Committee Chairman David Scott (D-GA):

• Chairman Scott noted how the cryptocurrency market was very volatile. He asked Mr. Lukken, Mr. Duffy, and Mr. Bankman-Fried to address whether the FTX proposal would make the cryptocurrency market riskier for customers.
  • Mr. Duffy noted how cryptocurrency advocates often stated that 90 percent of cryptocurrency trading and investment activity was moving abroad. He commented that this dynamic meant that most of the cryptocurrency trading and investment losses were also moving abroad. He contended that FTX’s proposal was “fraught with dangers.” He noted how CME Group deployed a traditional clearing model and commented that listed derivatives did not cause the 2008 Financial Crisis. He asserted that levered bilateral derivatives were instead responsible for the 2008 Financial Crisis. He stated that the risk associated with cryptocurrency derivative products could be “catastrophic” if not properly regulated. He also remarked that the FTX proposal’s approach could be applied to asset classes beyond cryptocurrency derivatives, which he called concerning.
  • Mr. Lukken remarked that FCMs had long played key roles in terms of protecting the funds of customers. He elaborated that FCMs ensured that customer funds were segregated, guaranteed customer funds, and held capital against customer funds. He noted that FTX was arguing that they could replicate these customer protections in other ways as part of their DCO application. He contended however that FCMs were designed to compartmentalize risk away from CCPs and stated that an FCM’s diversified risk helped to protect against systemic events.
  • Mr. Bankman-Fried remarked that FTX’s proposal would make cryptocurrency markets less volatile and less risky. He noted how there was currently no federal oversight of cryptocurrency markets. He stated that having federally licensed cryptocurrency derivatives exchanges would help to ensure that these exchanges met safety standards. He also discussed how unlisted and untracked bespoke contracts without central clearing could cause financial crises. He stated that the FTX proposal would provide CFTC oversight of such contracts.
• Chairman Scott then asked Mr. Edmonds to comment on how FTX’s proposed clearing model would stand up to international regulatory standards, such as those required to maintain equivalency with the EU and UK markets.
  • Mr. Edmonds noted how the EU and the UK had both indicated that they would apply the same rules to clearing models that posed the same risks. He stated that FTX’s proposal could not be approved in its current form under current rules. He commented that this situation could lead international regulators to not deem U.S. regulatory standards to be equivalent.

Full Committee Ranking Member Glenn “GT” Thompson (R-PA):

• Ranking Member Thompson asked Mr. Bankman-Fried to address why the markets should deviate from the “well-tested” approach to clearing employed at other exchanges (such as CME Group and ICE) to the “virtually” unknown approach to clearing being proposed by FTX. He asked Mr. Bankman-Fried to answer why this risk was warranted.
  • Mr. Bankman-Fried remarked that a diversity of risk models ought to be permitted so long as these risk models were all deemed suitable and consistent with the CFTC’s regulations. He asserted that the FTX proposal was consistent with the CFTC’s current rules and regulations and that this proposal would not require a new rulemaking from the CFTC. He then discussed how the FTX proposal would have collateral for all positions be held directly at the clearinghouse. He indicated that the CFTC would provide oversight of this collateral and that this collateral would be guaranteed to be segregated. He commented that this approach would provide an additional layer of security and guarantee of assets relative to other risk models. He also stated that having a faster risk model would be appropriate for digital assets and that faster risk models would be able to make more precise liquidation judgements about the health of positions. He testified that FTX did not have any plans to launch non-digital asset contracts “any time soon” that would use their proposed risk model. He further stated that the FTX model would provide equitable access to all market participants and provide transparent market data to everyone. He reiterated his assertion that the FTX proposal would not depart from existing CFTC rules and regulations and commented that the FTX proposal’s elements were already present in products that were currently being listed.
• Ranking Member Thompson asked Mr. Perkins to identify aspects of the FTX proposal that clearinghouses ought to consider adopting.
  • Mr. Perkins remarked that collateralization approaches for current futures markets were ill-suited for 24/7 cryptocurrency markets. He explained that the current collateralization approach involved clients putting on risk, clearinghouse collateral obligations being met immediately, and waiting until the following day to receive the collateral back. He commented that this approach was ill-suited for highly volatile markets that were constantly moving. He contended that a risk model that supported real-time collateralization would be better able to guard against systemic risk. He stated that the FTX model would address this collateralization issue. He also asserted that the aforementioned collateral issues made the current intermediated models ill-suited to provide services for cryptocurrency derivatives.
• Ranking Member Thompson then noted how Mr. Edmonds had asserted that innovation could not supersede the primary functions of futures markets for price discovery and hedging. He asked Mr. Edmonds to distinguish between bad types of innovation and good types of innovation in the context of futures markets.
  • Mr. Edmonds remarked that market participants were ultimately interested in regulatory certainty and commented that maintaining two regulatory standards would foster uncertainty in the market. He asserted that policymakers ought to prioritize regulatory certainty for market participants.

Full Committee Vice-Chair Alma Adams (D-NC):

• Vice-Chair Adams noted how the Futures Industry Association represented over 80 percent of FCMs and commented that the FTX proposal if approved would alter the role of U.S.-registered FCMs if it were to be accepted. She asked Mr. Lukken to address what would happen if the model in the FTX proposal were to be applied to other commodity markets.
  • Mr. Lukken remarked that the FTX proposal required further analysis because it remained uncertain as to whether the customer protections afforded to commercial hedgers would be the same under this model. He also noted how the FTX proposal’s risk model was focused on auto-liquidating small retail cryptocurrency products. He discussed how large commercial hedgers often needed to hold large positions and stated that auto-liquidating these positions could have disruptive effects on the marketplace.
• Vice-Chair Adams interjected to ask Mr. Lukken to indicate whether FTX and similar players would be expected to shoulder the risks that clearinghouses were traditionally responsible for under the FTX proposal.
  • Mr. Lukken answered affirmatively. He commended FTX for its willingness to assume the risks of defaults. He stated however that the FTX proposal will also eliminate a significant portion of the FCM capital that is held against positions.
• Vice-Chair Adams asked Mr. Bankman-Fried to address how FTX planned to protect consumers that used its platform if the CFTC were to accept their proposal.
  • Mr. Bankman-Fried testified that FTX maintained the same customer protections that were typically found in DCOs and DCMs. He indicated that these protections were in addition to all of the customer protections that were typically found in FCMs. He stated that FTX had conducted “deep analyses” of both rules and regulations and of existing FCMs to ensure that FTX offered similar levels of transparency, suitability, and disclosures. He further noted how FTX was subject to the Bank Secrecy Act (BSA) and know your customer (KYC) requirements for FTX US Derivatives. He indicated that FTX maintained KYC and anti-money laundering (AML) policies for users and for all cryptocurrency and fiat currency transactions that went through their platform. He lastly testified that FTX would be providing transparency around any digital assets that they listed on their platform. He stated that this transparency would go “far above” what current regulations require.
• Vice-Chair Adams then attributed the “skyrocketing” growth in decentralized finance (DeFi) to its accessibility. He asked Mr. Duffy to comment on the “user friendliness” of DeFi and to address how CME Group prioritized financial inclusion.
  • Mr. Duffy remarked that CME Group provided equitable access to all parties and commented that his company’s model had been time-tested. He also noted that CME Group did not accept credit cards as a means of payment.
• Vice-Chair Adams interjected to indicate that her question period time had expired.

Rep. Austin Scott (R-GA):

• Rep. Scott first remarked that he was more concerned about the price of food and energy than the price of digital currencies. He then stated that the upcoming CFTC roundtable would provide more information about the FTX proposal. He expressed concerns over the FTX proposal’s potential to disrupt the broader markets. He also expressed indifference as to whether the majority of cryptocurrency trading activity was occurring domestically or abroad. He asked Mr. Bankman-Fried to confirm that FTX offered cryptocurrency derivatives outside of the U.S.
  • Mr. Bankman-Fried confirmed that FTX offered cryptocurrency derivatives outside of the U.S.
• Rep. Scott asked Mr. Bankman-Fried to indicate whether U.S. investors could use the FTX platform outside of the U.S. to trade cryptocurrency derivatives.
  • Mr. Bankman-Fried stated that U.S.-based investors could not trade cryptocurrency derivatives on the FTX platform outside of the U.S. He indicated that FTX maintained a separate platform for U.S. investors that did not have a margined futures product. He noted however that FTX did offer a margined futures product on its overseas application (which was licensed by many countries).
• Rep. Scott then noted how Mr. Edmonds had raised concerns that the FTX proposal could eventually be applied to traditional agriculture and energy markets. He also noted how Mr. Edmonds had asserted that innovations could not supersede the primary function of futures markets for price discovery and hedging. He expressed agreement with Mr. Edmonds’s views. He asked Mr. Edmonds to elaborate on how the FTX proposal could eventually impact futures markets and his farmer constituents that use these markets.
  • Mr. Edmonds remarked that FTX’s proposed risk model would raise costs for market participants because it would entail pre-funding. He noted how FCMs currently resided in the middle of futures transactions and had longer-term relationships with their end-users. He stated that the FTX proposal would be focused on individual transactions, which would require substantial pre-funding in order to prepare for a potential liquidation event.
• Rep. Scott provided Mr. Bankman-Fried with an opportunity to respond to his concerns about the FTX proposal and its potential impact on the energy and commodity markets.
  • Mr. Bankman-Fried acknowledged that the FTX proposal would need further analysis for certain asset classes before FTX would want to launch new products for those asset classes. He testified that FTX was not planning to launch energy products “anytime soon” with their proposed model. He stated that FTX’s proposed model would initially focus on digital assets. He commented that a different assessment would need to be made for assets that were not typically traded 24/7, had physical settlement in physical warehouses, and involved different types of market participants.
• Rep. Scott interjected to comment that FTX’s application with the CFTC was not limited to margin digital commodities.
  • Mr. Bankman-Fried remarked that the CFTC would likely not want FTX to list non-digital assets immediately upon receiving approval. He stated that FTX’s application was not limited to margin digital committees due to the nature of the CFTC’s standard application process. He expressed FTX’s willingness to commit to a time period for not listing non-digital assets as part of its application process.
• Rep. Scott asked Mr. Bankman-Fried to indicate whether FTX would accept a permanent restriction on listing non-digital assets on its platform.
  • Mr. Bankman-Fried commented that there should be consideration regarding the suitability of assets listed on FTX’s platform.

Rep. Jahana Hayes (D-CT):

• Rep. Hayes noted how FTX’s proposal would remove intermediaries as a means of democratizing the digital currency market. She expressed concerns that the removal of intermediaries could create an opening for fraud and abuse (particularly for new customers that were entering the digital assets market for the first time). She also expressed concerns that the volatility of the digital assets market could lead retail customers to experience significant losses. She asked Mr. Bankman-Fried to respond to the assertion that the elimination of capital investment combined with FTX’s proposal to self-fund their guarantee fund would result in a lack of incentive for market participants to mitigate their own risks.
  • Mr. Bankman-Fried first discussed the importance of maintaining protections against frauds and scams and acknowledged that intermediaries (such as FCMs) often provided such protections. He stated that the FTX proposal did include protections against frauds and scams and indicated that the CFTC would ensure that FTX maintained sufficient customer protections. He also highlighted how FTX’s proposal would entail FTX putting up its own capital as a first line of defense against an adverse market event. He further noted how the FTX proposal would have the initial margin for the positions be posted directly to the clearinghouse. He commented that this approach would ensure that this capital would have CFTC oversight and be held in segregated accounts (which provides a capital backstop for the customer). He lastly remarked that FTX was “open and excited” to work with FCMs for institutions that desired to access their funds through intermediaries. He noted that FCMs could play a key role in terms of extending credit to their clients.
• Rep. Hayes asked Mr. Duffy to address whether FTX’s proposed model would be secure enough for retail investors to build wealth or if the increased market volatility caused by the model’s lack of backstops would endanger the investments of retail investors.
  • Mr. Duffy commented that it was very difficult to predict whether retail investors would profit or lose money using FTX’s proposed model given how profits were often a result of luck. He then noted how Mr. Bankman-Fried had stated that FTX will not apply its proposal to products beyond digital assets. He called this statement irrational and commented that the model would provide FTX with an unfair advantage in the market. He also criticized FTX for failing to provide sufficient education to retail investors and mentioned how CME Group had long worked to educate retail investors about their exchange and offered products. He stated that most investors within the cryptocurrency space were retail investors.
• Rep. Hayes acknowledged that her question period time had expired. She indicated that she would submit an additional question for the hearing’s record regarding the additional funding that the CFTC would require to oversee cryptocurrencies.

Rep. Rick Crawford (R-AR):

• Rep. Crawford expressed concerns that the FTX proposal might discourage agriculture producers from participating in the futures market. He also Mr. Bankman-Fried to indicate whether the CFTC’s approval of the FTX proposal would enable other exchanges to apply FTX proposed model for futures contracts to traditional commodities (such as cotton, corn, or wheat). He also asked Mr. Bankman-Fried to address whether there were safeguards to ensure that the FTX proposal would not be applied in the future beyond its current intent.
  • Mr. Bankman-Fried noted how the CFTC oversaw all clearinghouses and exchanges and oversee any new risk model submissions. He indicated that the CFTC could deem risk model submissions inappropriate based on their assessments. He commented that Congress could provide input to the CFTC regarding how the Agency ought to assess risk model submissions. He stated that it would be appropriate for the CFTC to have a longer period of discussion on agricultural commodities and risk models prior to the implementation of any new models.
• Rep. Crawford highlighted how cryptocurrencies had proven very volatile in recent months. He asked Mr. Duffy to address whether these cryptocurrency trends were concerning, particularly as they related to market risk and asset volatility.
  • Mr. Duffy first remarked that either FTX or another company would eventually apply the FTX proposal to asset classes beyond digital assets because it was a cheaper regulatory model to employ. He also highlighted how traditional commodities (such as corn) have intrinsic value while cryptocurrencies do not. He commented that this dynamic made volatility within the cryptocurrency space more dangerous. He asserted that the risk of the FTX model being applied to other markets was “extremely detrimental.” He mentioned how the current war between Russia and Ukraine put one-third of the world’s wheat supply in jeopardy. He stated that this situation underscored the importance of having sound and prudent risk management options for commodities. He also asserted that CME Group would be forced into deploying FTX’s proposed model if the CFTC approves it because of its cheaper costs and their fiduciary obligations to their shareholders. He called the FTX proposal “fraught with danger” and alleged that FTX’s application with the CFTC contradicted many of the comments being made at the hearing.
• Rep. Crawford asked Mr. Duffy to indicate whether inflation and market volatility were mutually reinforcing trends.
  • Mr. Duffy answered affirmatively.

Rep. Shontel Brown (D-OH):

• Rep. Brown asked Mr. Bankman-Fried to address how FTX planned to strike the right balance between offering innovative financial products that eliminate barriers to entry for investors while also ensuring that consumer protections would be maintained.
  • Mr. Bankman-Fried testified that FTX would have suitability tests and transparency measures for their listed products. He noted that these tests would be in addition to all of the existing customer protections that exist for traditional models, futures exchanges, and intermediates. He testified that FTX would provide voluntary disclosures and analyses of their listed products to their platform users. He further indicated that FTX would provide disclosures around the mechanics of their platform. He expressed FTX’s willingness to follow-up with Rep. Brown and provide materials on the company’s plans for transparency, disclosure, and suitability.
• Rep. Brown asked Mr. Bankman-Fried to address how FTX ensured that their customers would have an appropriate understanding of derivatives trading before making trades on their platform.
  • Mr. Bankman-Fried noted how users were required to go through a walkthrough of the FTX US Derivatives platform that explained how everything worked. He also indicated that smaller users would need to complete a test to prove their knowledge about these products. He stated that these measures were in addition to FTX making its entire rulebook and all of its market data publicly available. He expressed FTX’s willingness to follow-up with Rep. Brown and provide the company’s educational materials for its customers.
• Rep. Brown asked Mr. Perkins to indicate how Coinbase ensured that their customers would have an appropriate understanding of derivatives trading before making trades on their platform.
  • Mr. Perkins clarified that his firm was CoinFund Management (and not Coinbase). He indicated that CoinFund Management was not an exchange and was instead an investment management firm. He expressed his willingness to follow-up with Rep. Brown regarding her inquiry.

Rep. David Rouzer (R-NC):

• Rep. Rouzer noted how CME Group had proposed its own direct clearing model in 2016. He asked Mr. Duffy to discuss the problems that CME Group had sought to address through this 2016 model. He also asked Mr. Duffy to indicate whether these problems still existed today.
  • Mr. Duffy remarked that he has never been opposed to a direct clearing model and clarified that his opposition was to FTX’s specific proposal for a direct clearing model. He discussed how CME Group’s 2016 direct clearing model proposal was a response to central bank leverage ratio rules under Basel III at the time. He commented that these rules required banks to hold significant amounts of capital. He stated that CME Group’s 2016 direct clearing model proposal sought to enable clients to remain on CME Group’s books directly while also enabling clients to adhere to the rules and procedures of their FCMs. He testified that CME Group had withdrew this direct clearing model proposal at the behest of the CFTC. He also stated that subsequent changes in the Basel III leverage ratio rules had made banks more willing to do business with CME Group.
• Rep. Rouzer asked Mr. Bankman-Fried to indicate how many other countries had authorized models like the one that FTX was proposing.
  • Mr. Bankman-Fried testified that FTX was currently working with regulators in a “large number of countries” around the world. He indicated that FTX had already received licenses from several countries and jurisdictions, including Japan, Switzerland, the EU, and Australia. He further stated that FTX had engaged in “productive” conversations with various other countries. He asserted that these countries were comfortable with how FTX operated. He then remarked that FTX was proposing a more conservative model for FTX US Derivatives relative to the models the company used overseas. He indicated that FTX complied with AML and KYC standards globally and worked with law enforcement agencies whenever possible.
• Rep. Rouzer asked Mr. Lukken to indicate whether Futures Industry Association (FIA) members might be interested in participating in an exchange that did not charge for data and connectivity and that did not require contributions to the clearinghouse guarantee fund.
  • Mr. Lukken answered affirmatively. He noted that FCMs had long beleived that a certain amount of regulatory data was necessary for the risk management functions that they provide. He asserted that providing access to this data in cost effective ways would benefit downstream market users. He called FTX innovative for providing free data and pledging its own capital as a first line of defense against adverse market events.
• Rep. Rouzer asked Mr. Lukken to indicate whether a situation where two exchanges controlled 97 percent of U.S. futures trading volume constituted a competitive market.
  • Mr. Lukken expressed support for more competition within the U.S. futures trading market. He acknowledged however that the futures trading market was a scale business, which had a tendency for market concentration.
• Rep. Rouzer lastly commented that cryptocurrency would likely remain popular and asserted that the U.S. ought to be at the forefront of cryptocurrency innovation.

Rep. Ann Kuster (D-NH):

• Rep. Kuster expressed interest in how FTX’s proposal would take intermediaries out of the clearinghouse model. She noted how intermediaries had historically played key roles in markets in terms of vetting traders, assuming certain levels of risk, and providing emergency capital to clearinghouses during periods of extreme uncertainty. She asked Mr. Duffy to indicate whether all moves towards disintermediation in derivatives organizations create risks like those noted in his testimony regarding the FTX proposal.
  • Mr. Duffy answered no. He commented that while the FTX proposal’s disintermediation features were concerning, he commented that he was not universally opposed to direct clearing models. He noted how exchanges and clearing firms currently imposed margin charges, which supported risk management efforts. He called this risk management capability an important benefit of an intermediated system. He concluded that while CME Group was considering direct clearing models, he asserted that he was not interested in leading efforts to move all derivatives organizations towards disintermediation.
• Rep. Kuster asked Mr. Bankman-Fried to identify FTX’s top considerations as it developed its non-intermediated model proposal. She also asked Mr. Bankman-Fried to address whether FTX had considered any alternative structures to protect consumers from the risk of a significant market crash.
  • Mr. Bankman-Fried first commented that stocks could also be very volatile. He then discussed how FTX had considered various models and stated that FTX’s proposed model was very similar to the models currently being used in other countries for cryptocurrency futures exchanges. He testified that these models had already withstood significant market moves. He acknowledged that there were advantages to intermediated models. He stated that FTX would permit trading firms to send their orders through an FCM. He also stated that FTX’s proposed model would permit intermediaries and FCMs to maintain bespoke arrangements with their clients that would involve higher margin requirements.

Rep. Rodney Davis (R-IL):

• Rep. Davis stated that there did not exist a real distinction between the clearing of agriculture commodities and the clearing of cryptocurrencies in terms of current risk management standards. He raised concerns that the FTX proposal could impact futures market stability and the ability to manage volatility in agriculture commodity prices. He specifically expressed concerns that the CFTC possessed the ability to create a de facto regulatory structure via piecemeal applications. He commented that this approach would not result in clear guidelines or a “level playing field” for all market participants and stakeholders. He expressed bewilderment that a politically appointed commission (such as the CFTC) could set singular market standards for one company that would impact the entire market. He contended that this approach was inappropriate for making far-reaching market structure changes and expressed concerns that the approach could lead to further market volatility. He called on the CFTC to take a prudent approach in considering the FTX proposal and to undergo the proper rulemaking process. He asked Mr. Duffy to respond to his comments.
  • Mr. Duffy expressed agreement with Rep. Davis’s comments. He raised concerns that the CFTC’s approval of the FTX proposal would make the proposal’s framework applicable to all asset classes (rather than just digital assets). He remarked that CME Group would be forced to adopt the FTX model for all commodities if the models were approved given that this new model would be significantly cheaper than the status quo. He also stated that this model would subject farmers to the prospect of auto-liquidation for their positions at all hours of the day.
• Rep. Davis asked Mr. Bankman-Fried to address how FTX’s proposal would impact farmers in his Congressional District.
  • Mr. Bankman-Fried first commented that FTX would only deploy a risk model if it believed it to be appropriate for a given commodity’s derivatives. He then asserted that FTX’s proposal would be healthy for markets (especially in the context of digital assets). He stated that FTX’s proposal constituted a more conservative risk model that would be non-recourse with respect to the participants. He explained that the model required that participants submit collateral to the clearinghouse beforehand and stated that there existed clear and transparent rules surrounding the model’s risk engine. He commented that the aforementioned features would decrease volatility and increase liquidity in markets. He reiterated FTX’s previous commitment to not launch this proposed model in agriculture markets “any time soon.” He stated that the application of the FTX proposal to agriculture markets would require further review from the CFTC’s Division of Clearing and Risk (DCR).
• Note: Rep. Davis’s question period time expired at this point.

Rep. Sean Patrick Maloney (D-NY):

• Rep. Maloney asked Mr. Bankman-Fried to explain the auto-liquidation element of the FTX proposal.
  • Mr. Bankman-Fried posited a scenario in which a FTX user has a futures position under the proposed model. He noted that this position would have some collateral backing it and would be held transparently with a clearinghouse. He highlighted how the collateral backing that position would eventually run out if the market were to move significantly enough against the position. He stated that this position would then need to be closed because it no longer had collateral backing it. He remarked that various risk models would respond to the aforementioned scenario differently. He noted how a recourse-based risk model would enable a platform to keep the position open while simultaneously going after the user’s other assets (such as the user’s home) in order to restore the position’s backing. He stated that FTX was proposing a risk engine that would wait to liquidate a position until the position was deemed to no longer be viable. He commented that this approach would enable the position to be preserved if possible and would guard against systemic risk.
• Rep. Maloney asked Mr. Bankman-Fried to address how FTX could confidently ensure that it maintained the correct risk models.
  • Mr. Bankman-Fried testified that FTX had worked extensively with the CFTC to test its risk models using both historical data and simulated data. He also noted that FTX’s proposed model would be more conservative than the model that FTX was currently using in international markets. He stated that this less conservative model had already withstood days with 40 percent moves in markets. He testified that FTX had never gotten near a point where it would need to mutualize losses using this less conservative model. He also stated that the entire insurance fund draw out over the model’s entire history was a “tiny fraction” of the total capital that FTX had proposed to back their U.S. risk model’s initial guarantee fund.
• Rep. Maloney then asked Mr. Duffy to clarify whether he was outright opposed to the FTX proposal or he was simply against pursuing it at this time.
  • Mr. Duffy remarked that the FTX proposal ought to be considered through a formal rulemaking process at the CFTC. He asserted that consideration of the FTX proposal should not be limited to the proposal’s impact on cryptocurrencies and should instead be focused on market structure. He then discussed how CME Group was required to discount its collateral at a certain value. He stated that FTX’s discount for their collateral for Bitcoin was 5 percent while their margin for Bitcoin was 15 percent. He asserted that these price levels would result in very fast auto-liquidations. He concluded that FTX’s proposal was problematic.
• Note: Rep. Maloney’s question period time expired at this point.

Rep. Tracey Mann (R-KS):

• Rep. Mann asked Mr. Bankman-Fried to explain the difference between the FTX proposal and the ICE NGX model that was currently in existence.
  • Mr. Bankman-Fried noted how there existed various CFTC-licensed futures exchanges that contain elements of the FTX proposal. He stated that FTX was combining many existing elements from other exchanges to form their own proposal. He remarked that the FTX proposal was considered novel because it would combine collateral held with a clearinghouse, a real-time margining system, and an option for disintermediated direct access to the platform for all participants.
• Rep. Mann also noted how there was debate surrounding whether FTX’s proposed $250 million guarantee fund was sufficient relative to the billions of dollars maintained by both CME Group and ICE in their guarantee funds. He asked Mr. Bankman-Fried to address why FTX’s holdings would be sufficient relative to the risk in the market.
  • Mr. Bankman-Fried noted how the FTX proposal would require margin to be held with a clearinghouse from all open positions, which would be in addition to FTX’s proposed $250 million guarantee fund. He clarified that the $250 million for FTX’s proposed guaranteed fund would all come from FTX and that none of this money would be mutualized. He testified that FTX currently had tens of billions of dollars of collateral backing customer positions on its platform internationally. He commented that this collateral would play the role of the collateral being held by intermediaries in other models and indicated that this collateral would backstop positions on the FTX platform. He further stated that FTX had conducted an “extensive” analysis of their proposed model’s international performance. He testified that the total historical insurance fund draw of this model had only been a few percent of the guarantee fund being proposed and indicated that this draw had been over the previous three years combined. He added that the international version of FTX’s currently proposed model was less conservative. He then asserted that Mr. Duffy’s description of FTX’s collateral discount rates and margin rates were based on FTX’s international model (rather than their proposed U.S. model). He stated that FTX’s model had performed well internationally.
• Rep. Mann then noted how Mr. Duffy had raised concerns about volatility and market disruptions spilling over from a direct access market into the traditional market. He asked Mr. Duffy to elaborate on how he saw this risk transferring across markets.
  • Mr. Duffy noted how FTX was proposing a direct model, which would constitute a market structure change. He predicted that non-cryptocurrency market participants would be ill-prepared to deal with the FTX proposed model’s auto-liquidator. He noted how CME Group customers had margin from both CME Group and their clearing firms. He explained that these clearing firms will contact their customers to request that the customers post more capital against a position before said position is liquidated. He stated that the auto-liquidator in the FTX proposal would need to run 24/7, which would be ill-suited for market participants involved in traditional commodities. He contended that this 24/7 auto-liquidator would put the assets of these market participants at risk.

Rep. Tom O’Halleran (D-AZ):

• Rep. O’Halleran remarked that the CFTC needed to work with the Committee on an ongoing basis when considering new market structures and models. He recounted his experience on the board of directors of the Chicago Board of Trade and mentioned how he had observed market volatility first-hand. He stated that clearinghouses had played a key role in stabilizing markets during these periods of volatility. He commended the CFTC’s deliberate and public consideration of the FTX proposal given how their decision on the proposal will likely set a precedent for future regulation. He criticized the CFTC however for beginning their consideration of the FTX proposal “way too late.” He then discussed how the FTX proposal would replace the traditional distributed risk clearing model with a more automated and centralized model that lacked intermediation. He asked Mr. Lukken to indicate whether combining the functions of various market participants into a centralized entity would create potential conflicts of interest.
  • Mr. Lukken discussed how the U.S. had traditionally separated responsibilities across different entities. He elaborated that FCMs had traditionally overseen clients, clearinghouses had traditionally overseen FCMs and the client’s money, and regulators had traditionally overseen everything. He stated that the integration of these various responsibilities (as proposed by FTX) could result in conflicts of interest.
• Rep. O’Halleran noted how one way that the FTX proposal accounted for risk management is through auto-liquidation. He asked Mr. Duffy to explain how the auto-liquidation process would function. He also commented that digital assets were known for being highly volatile. He asked Mr. Duffy to indicate whether he was concerned that the FTX proposal’s market structure would lead to a greater number of liquidations.
  • Mr. Duffy remarked that it was very difficult for clearinghouses to predict the directions of markets. He stated that CME Group was focused on managing the risks of market participants and ensuring that pays and collects were done properly. He testified that CME Group had never needed to draw on its guarantee fund to cover losses throughout its entire history. He stated that FTX by contrast remained a very young company and had mainly experienced a bullish cryptocurrency market during its brief history. He remarked that any new proposal before the CFTC ought to receive input from all market participants (rather than a single segment of the market).

Rep. Michelle Fischbach (R-MN):

• Rep. Fischbach noted how farmers and the agriculture community were core users of the derivatives market. She asked Mr. Lukken to explain why the derivatives markets were so important to farmers and the agriculture community. She also asked Mr. Lukken to discuss the tools in the current derivatives market that helped farmers and the agriculture community to manage risks.
  • Mr. Lukken noted how farmers tended to have very thin margins. He highlighted how there existed significant price uncertainty between when crops were planted and crops were harvested. He stated that derivatives markets enabled farmers to manage this uncertainty. He remarked that the FTX proposal currently under consideration could greatly impact these markets.
• Rep. Fischbach asked Mr. Lukken to address how the FTX proposal could impact the agriculture market.
  • Mr. Lukken remarked that the FTX proposal could apply to any asset class and asserted that the proposal was therefore not limited to cryptocurrencies. He asserted that the U.S. currently maintains a “best-in-class” regulatory system for its futures markets and commented that a departure from this regulatory system would have impacts beyond the cryptocurrency sector. He stated that the U.S. must therefore be thoughtful and deliberative about new approaches to futures regulation. He emphasized that the agriculture community required access to risk management services and asserted that the U.S. must ensure the fairness and safety of these services.
• Rep. Fischbach provided Mr. Bankman-Fried with an opportunity to address how the FTX proposal would impact the agriculture market.
  • Mr. Bankman-Fried testified that FTX did not plan to apply its proposed model to the agriculture sector “any time soon.” He also expressed FTX’s willingness to make this commitment legally binding. He then expressed his interest in engaging in conversations with agriculture stakeholders about agriculture market risk models. He acknowledged that FTX would need to provide additional considerations around how the model’s risk engine would deal with weekends and physical delivery obligations. He contended however that FTX’s proposed model contained helpful and attractive features for farmers, including its easy and equitable access, clear and transparent margining, and free market data.
• Rep. Fischbach provided Mr. Duffy with an opportunity to respond to Mr. Bankman-Fried’s comments.
  • Mr. Duffy first testified that CME Group had historically not charged for access to its market data until recently. He stated that CME Group now charged for access to its market data so that it could cover the cost and time associated with accumulating the data. He mentioned that this data included historical data and derived data and commented that the data extended beyond market data on pricing. He then noted that while Mr. Bankman-Fried had repeatedly stated that FTX would only apply its proposed model to cryptocurrencies, he emphasized that the FTX proposal if approved would allow for the company to apply its proposed model to commodities beyond cryptocurrencies. He stated that the approval of the FTX proposal would force his company to pursue the FTX model out of fear that FTX would eventually apply their model to traditional commodities. He elaborated that FTX will have gained experience using their model for cryptocurrencies that will provide them with an advantage if and when FTX decides to apply their model to traditional commodities. He asserted that CME Group would therefore need to preemptively adopt the FTX model to remain competitive. He stated that this situation could leave agriculture producers without derivatives options during rough periods given the FTX model’s untested nature.

Rep. Ro Khanna (D-CA):

• Rep. Khanna asked Mr. Duffy to define blockchain technology and to provide examples of use cases for cryptocurrencies.
  • Mr. Duffy explained that a blockchain was a node that was run by either centralized or decentralized platforms. He noted that a blockchain contained certain information that could only be changed by people with access to the information. He commented that there were typically several procedures and protocols associated with amending this information. He stated that blockchain technology could support the transfer of medical records.
• Rep. Khanna interjected to ask Mr. Duffy to indicate whether there was a use case for stablecoins.
  • Mr. Duffy stated that recent moves in the stablecoin market created uncertainty as to whether there existed a use case for stablecoins.
• Rep. Khanna interjected to ask Mr. Duffy to indicate whether there was a use case for Solana and other popular cryptocurrencies.
  • Mr. Duffy commented that he was not a cryptocurrency expert. He indicated that CME Group listed Bitcoin futures.
• Rep. Khanna interjected to asked Mr. Duffy to confirm his assertion that FTX had no capital requirements for participants. He noted how CFTC’s Part 39 regulation provided capital requirements for all exchanges.
  • Mr. Duffy remarked that he had asserted that FTX had different capital requirements relative to other institutions.
• Rep. Khanna interjected to assert that Mr. Duffy’s submitted written statement had said that the FTX regime had no capital requirements for participants. He suggested that Mr. Duffy amend his written statement.
  • Mr. Duffy asked Mr. Khanna to provide the exact statement that he was referring to. He suggested that Rep. Khanna might be conflating capital and margin.
• Rep. Khanna called on Mr. Duffy to submit follow-up responses to the Committee to acknowledge that his submitted written testimony was incorrect and that he had admitted to not being an expert on cryptocurrencies.

Rep. Jim Baird (R-IN):

• Rep. Baird discussed how the U.S. lagged other countries in terms of its adoption of digital assets and highlighted how over 95 percent of digital assets trading volume occurred overseas. He asked the witnesses to address how the onshoring of this digital asset trading activity would benefit Americans (including farmers and ranchers).
  • Mr. Lukken remarked that the U.S. currently had gaps in its regulation of cryptocurrencies and called on the U.S. to develop a better regulatory framework for cryptocurrencies. He commented that cryptocurrencies were not a fad and stated that a strong regulatory framework would attract cryptocurrency activity to the U.S.
  • Mr. Edmonds remarked that market participants currently did not know which regulators were responsible for overseeing a given version of a digital asset. He noted how the U.S. Securities and Exchange Commission (SEC), CFTC, the U.S. Department of the Treasury, and the U.S. Federal Reserve all claimed that various digital assets were under their purviews. He stated that this current uncertainty made it difficult for market participants to proceed. He stated that many market participants (such as FTX) appeared to be looking to tailor their offerings into the best available regulatory structures.
  • Mr. Perkins remarked that Web 3 was not a fad and called on the U.S. to establish a robust regulatory regime for derivatives that would enable parties to hedge their risks. He asserted that FTX’s proposal was viable and worthy of consideration. He stated that the FTX proposal would establish a defaulter pays system, which entailed requiring the people that put risk into the financial system to pay for that risk through collateral. He mentioned how he had previously run a FCM and commented that it was difficult for the FCM to provide capacity to parties outside of their top clients. He stated that the FTX proposal could promote financial inclusion through providing more market participants with the ability to hedge their risks in the U.S.
  • Mr. Bankman-Fried noted how most digital assets trading activity was currently occurring outside of the U.S. and commented that this situation did not benefit the U.S. He stated that U.S. cryptocurrency traders lacked federal oversight of cryptocurrency markets, which reduced their access to liquidity, depth of order book, and hedging capabilities relative to cryptocurrency traders in other jurisdictions. He contended that federal regulation of cryptocurrencies would support domestic economic activities and create U.S. jobs.
  • Mr. Duffy remarked that markets were global in nature and stated that certain products tended to move to certain jurisdictions. He speculated that most cryptocurrency market participants were retail participants and suggested that it was not imperative for the U.S. to be the global leader in cryptocurrency trading activity.

Rep. Kim Schrier (D-WA):

• Rep. Schrier discussed how even the most discerning consumers could be vulnerable to exploitation when making financial trades and contended that all DCOs must therefore abide by the rules of the CEA. She applauded the CFTC for its thoughtful and diligent approach in considering the FTX proposal. She asked Mr. Bankman-Fried to address how FTX would strike the appropriate balance between offering new financial products that might expand economic opportunities for investors while still ensuring that consumer protections are maintained.
  • Mr. Bankman-Fried remarked that FTX wanted to offer equitable access to its platform and platform data so that consumers could fairly compete with the largest trading firms. He stated however that FTX also needed to maintain robust customer protections. He noted that FTX’s proposed model would have CFTC oversight, which would entail full transparency and disclosures about the listed disclosures and the mechanics of the exchange. He also noted how FTX would require users to pass product tutorials and quizzes in order to use their platform. He further testified that FTX was looking to create template registration-type statements for the assets they would list. He indicated that FTX would work with the CFTC to determine suitable assets to list.
• Rep. Schrier commended FTX for its efforts to make their disclosures comprehensible for consumers. She asked Mr. Bankman-Fried to provide additional information about the quizzes that FTX would give to consumers and FTX’s other educational materials. She also suggested that FTX might want to consider making use of stories as part of their consumer education strategy.
  • Mr. Bankman-Fried expressed FTX’s willingness to follow up with Rep. Schrier to share their educational materials. He asserted that financial educational materials ought to be intuitive and unavoidable for consumers.

Rep. Dusty Johnson (R-SD):

• Rep. Johnson noted how Mr. Lukken had previously stated that the FTX proposal’s auto-liquidation mechanism could have disruptive effects on the broader market. He asked Mr. Luken to elaborate on these disruptive effects.
  • Mr. Lukken noted how FCMs will typically attempt to manage defaulted positions when marketplace defaults occur. He explained that FCMs will work to either hedge these defaulted positions or prevent these defaulted positions from disrupting the broader marketplace. He noted how CFTC regulations required that FCMs not impact the broader marketplace. He stated that auto-liquidation of defaulted positions by nature did not provide room for discretion or judgment in dealing with such positions. He remarked that policymakers would need to consider how FTX’s proposed model’s auto-liquidator mechanism would impact both the hedger and the broader marketplace in the event of a very large position’s default.
• Rep. Johnson noted how there were concerns that an auto-liquidation mechanism could lead to systemic risks. He asked Mr. Lukken to explain these concerns.
  • Mr. Lukken remarked that auto-liquidation could create a self-reinforcing cycle in which defaults caused sell offs, which in turn caused more defaults. He noted how CCPs tended to work to move troubled positions to FCMs in order to prevent further market problems and protect prices and futures hedgers.
• Rep. Johnson noted how the FTX proposal would have FTX keep some of their capital in a reserve fund to respond to market defaults and uncertainty. He asked Mr. Lukken to indicate whether FTX’s capital reserve holdings were insufficient.
  • Mr. Lukken commented that it was difficult to determine whether FTX’s capital reserve holdings were sufficient. He noted how FTX’s largest clients were significantly smaller than a traditional FCM’s largest clients. He commented that this dynamic made it difficult to apply traditional stress tests to the FTX proposal. He called for further assessment of FTX’s ability to respond to widespread market defaults.
• Rep. Johnson asked Mr. Bankman-Fried to respond to concerns that FTX’s capital reserve might be insufficient for cushioning against the impacts of systemic risks.
  • Mr. Bankman-Fried testified that auto-liquidations would be done gradually under the FTX proposal to protect against unnecessarily liquidating a customer’s full position. He also acknowledged that there existed scenarios in which an institutional party can be very useful in managing a troubled position. He stated that FTX had two options in place to provide such institutional support. He indicated that the first option was the backstop liquidity provider system that involved institutional trading firms that could assume positions under extreme market conditions. He also indicated that the FTX proposal included optional intermediation, which would enable FCMs to post margin for the positions of their clients and work with clients on managing the troubled positions. He then predicted that the top three users of the FTX exchange in the U.S. would be very large based on FTX’s experience in foreign jurisdictions, which would make traditional stress tests applicable to the FTX proposal. He also stated that the amount of money that FTX was putting in its guarantee fund was “way above” what would be required based on traditional stress tests.

Rep. Salud Carbajal (D-CA):

• Rep. Carbajal noted how Mr. Bankman-Fried had called for equitable access to markets for all users so long as they are sufficiently informed and can demonstrate that they understand what they are trading. He asked Mr. Bankman-Fried to discuss how FTX will ensure that individuals fully understand the risks that they are taking should they choose to trade cryptocurrency on margin.
  • Mr. Bankman-Fried first noted how the majority of FTX’s low-engagement retail users who are not sophisticated traders did not access leveraged futures on the platform internationally. He indicated that most of these users were accessing spot markets and predicted that these trends would be similar in the U.S. He also noted how over 90 percent of the volume in the futures market was coming from users trading over $100,000 per day. He then discussed how FTX had a mandatory walkthrough of its platform for new users and indicated that this walkthrough provided an explanation of the exchange and products. He further noted how smaller FTX users were required to take a quiz to demonstrate their understanding of the exchange and its products. He asserted that his approach ensured that consumers were sufficiently knowledgeable about the FTX exchange and its products while still providing equitable access to all Americans.
• Rep. Carbajal then asked Mr. Duffy to address whether the clearinghouse model could evolve to better accommodate cryptocurrencies.
  • Mr. Duffy remarked that there were always ways to improve how clearinghouses managed risks. He also reiterated that he was not opposed to direct clearing models. He expressed opposition to FTX’s application because of its impact on market structures. He then disputed Rep. Ro Khanna’s (D-CA) previous assertion that he had provided false testimony to the Committee. He remarked that his testimony had asserted that the FTX proposal did not require participants to hold capital with an FCM (as opposed to asserting that FTX proposal has no capital requirements at all).

Rep. Kat Cammack (R-FL):

• Rep. Cammack noted how 95 percent of cryptocurrency derivatives and trading volume occurred outside of the U.S. She stated that the U.S. had an opportunity to make inroads into the cryptocurrency trading market and asserted that innovation would be critical to making these inroads. She asked Mr. Bankman-Fried to discuss how investors were impacted by the current system in which derivatives marketplaces demanded their users to pay for market data, order books, and market access.
  • Mr. Bankman-Fried remarked that these charges for market data, order books, and market access were advantaging larger traders over smaller traders. He stated that this situation was leading to information disparities amongst traders. He also remarked that these charges undermined the goal of price discovery. He further asserted that gated market data led to higher operational costs. He elaborated that many trading firms often spent large amounts of time arguing with trading platforms over market data disclosures. He lastly stated that providing free access to market data would support cryptocurrency innovation.
• Rep. Cammack then asked Mr. Bankman-Fried to address how FTX’s real-time risk management of margin products would impact market risk and asset volatility, especially during times of market uncertainty. She also asked Mr. Bankman-Fried to indicate whether FTX’s proposed model would have prevented the recent LME nickel futures market meltdown. 
  • Mr. Bankman-Fried asserted that FTX’s proposed model would have helped to prevent the recent LME nickel futures market meltdown. He stated that a real-time risk engine that knew a user’s exact capital holdings would not need to preemptively liquidate a user’s position. He remarked that this type of risk engine would not require users to post as much collateral. He also stated that this type of risk engine would provide users with a greater capital buffer before their positions were in danger of liquidation. He further stated that this type of risk engine would enable the operation of a non-recourse risk model.
• Rep. Cammack then asked Mr. Bankman-Fried to briefly explain why FTX was not interested in entering the agriculture derivatives space within the near future.
  • Mr. Bankman-Fried remarked that FTX would need to conduct more analysis before it considered entering the agriculture derivatives space. He stated that the agriculture derivatives space involved a different market structure and different settlement system.

Rep. Abigail Spanberger (D-VA):

• Rep. Spanberger expressed interest in the environmental impacts of cryptocurrencies. She mentioned how the University of Cambridge had found that Bitcoin mining required 132.48 terawatt hours of energy annually. She indicated that roughly 35 percent of all Bitcoin mining took place within the U.S. and that this mining translated into roughly 40 billion tons in carbon dioxide emissions in 2021. She asked Mr. Bankman-Fried to discuss how the U.S. could work to reduce carbon dioxide emissions as it worked with cryptocurrencies.
  • Mr. Bankman-Fried predicted that energy usage would not scale linearly with the cryptocurrency industry’s growth because most blockchains were proof of stake blockchains that use very little energy. He stated that most cryptocurrency transactions were already occurring on proof of stake blockchains. He predicted that proof of stake blockchains would be the blockchains that would become popular for transactions for economic and environmental reasons.
• Rep. Spanberger then yielded the remainder of her question period time to Rep. Kat Cammack (R-FL).

Rep. Kat Cammack (R-FL):

• Rep. Cammack mentioned how Mr. Edmonds had stated that FTX participants would lose their positions when markets moved against them and would have their positions liquidated at adverse prices. She noted however that Mr. Edmonds had also stated that exchange circuit breakers could already cause market participants to lose their positions during periods of heavy market volatility. She explained that the circuit breakers will halt trading during this volatility and indicated that these events could subject market participants to large and unaffordable margin calls at the end of trading days. She noted that market participants were often forced to liquidate their positions to afford these margin calls. She stated that it was possible for a market participant in this scenario to have their position liquidated at the end of a trading day only to have their position return to profitability the next day. She asked Mr. Edmonds to address how the potential for auto-liquidation under the FTX proposal differed from the current potential for forced liquidation resulting from market volatility and exchange circuit breakers.
  • Mr. Edmonds discussed how a FCM generally worked to intermediate the relationship between the market participant and their exchange. He explained that the FCM might extend credit to a market participant based on their knowledge of the participant’s position, which would reduce the likelihood of forced liquidation. He remarked however that the FTX model would not provide similar extensions of credit to market participants during periods of heavy market volatility. He also discussed how a given position’s profitability might fluctuate significantly throughout the day. He stated that auto-liquidation could prematurely close a position that might end up profitable and that a market participant using a FCM could better withstand periods of price volatility.
• Rep. Cammack acknowledged that his question period time had expired.

Rep. Rick Allen (R-GA):

• Rep. Allen noted how the financial markets (including the cryptocurrency market) had experienced significant fluctuations in recent days. He asked Mr. Duffy to indicate how these fluctuations had impacted the collateral at CME Group.
  • Mr. Duffy estimated that CME Group had between $225 billion and $240 billion in collateral in its clearinghouse.
• Rep. Allen stated that the purpose of the derivatives and futures markets was to reduce price volatility risks for agriculture producers. He asked Mr. Duffy to indicate the extent to which fluctuations in agriculture prices impacted his exchange’s collateral.
  • Mr. Duffy stated that the impact of fluctuations in agriculture prices on his exchange’s collateral was “very de minimis.”
• Rep. Allen then asked Mr. Bankman-Fried to address why FTX’s application to the CFTC was incomplete. He elaborated that FTX’s application had stated that there were other measures that would need to be implemented to sustain collateral and had requested guidance from the CFTC on identifying these other measures. He contended that FTX should have identified these other measures prior to having submitted their application to the CFTC.
  • Mr. Bankman-Fried stated that FTX believed that its application was complete.
• Rep. Allen asked Mr. Bankman-Fried to address how FTX would ensure stable collateral levels during periods of market fluctuations.
  • Mr. Bankman-Fried commented that he was unsure as to whether Rep. Allen’s question was focused on agriculture products or more general collateral volatility.
• Rep. Allen yielded back the remainder of his time.

Del. Stacey Plaskett (D-VI):

• Del. Plaskett noted that Mr. Perkins’s testimony had asserted that there were no drawbacks associated with embracing central clearing innovation. She noted that Mr. Perkins’s testimony had also called for the establishment of guardrails for central clearing. She asked Mr. Perkins to identify the types of guardrails that should be adopted.
  • Mr. Perkins remarked that the same principles for central clearing that applied to FTX should be applied to other exchanges. He stated that these exchanges should be subjected to “extreme but plausible” stress tests and should provide their users with sufficient disclosures. He further called it imperative for derivatives and future customers to be educated on the opportunities and risks associated with becoming involved with a given asset class. He reiterated that regulators ought to take a principles-based approach for regulating trading activity within a given asset class. He noted how the CFTC currently possessed the authority to police fraud, manipulation, and abuse in markets and asserted that there should be very little tolerance for these types of activities.
• Del. Plaskett interjected to express agreement with Mr. Perkins’s regarding the importance of customer education. She expressed skepticism however over new products that sought to target minority and historically underserved communities. She then noted how there were arguments that the CFTC should use the regular rulemaking process in its consideration of the FTX proposal. She asked Mr. Bankman-Fried to indicate whether he would be opposed to having CFTC consider the FTX proposal through the regular rulemaking process.
  • Mr. Bankman-Fried stated that CFTC’s consideration of the FTX proposal had adhered to the Commission’s standard rulemaking process.
• Del. Plaskett interjected to assert that CFTC had employed an ad hoc process in its consideration of the FTX proposal. She stated that CFTC’s consideration of the FTX proposal did not provide standard opportunities for public comment.
  • Mr. Bankman-Fried stated that it was unusual to have rulemaking as part of a margin order amendment application. He further called it unusual to have a Congressional hearing, public roundtable, and 60-day comment period on a margin order amendment application. He contended that the CFTC’s consideration of the FTX proposal was unusual in that it had higher levels of transparency and thoroughness. He expressed his willingness to follow-up with Del. Plaskett on her concern that standards and precedents were not being adhered to in the CFTC’s consideration of the FTX proposal.

Rep. Michael Cloud (R-TX):

• Rep. Cloud asked Mr. Duffy to identify the provisions of the FTX proposal that policymakers must consider if the proposal were to receive CFTC acceptance. 
  • Mr. Duffy first remarked that the FTX model ought to undergo a normal CFTC rulemaking process if it is to be accepted. He disputed the assertion that the FTX proposal was merely a margin order amendment and contended that the proposal would have industry-wide impacts on market structure. He then stated that CME Group would implement the FTX’s proposed model if it were approved. He commented that while he did not believe that FTX’s proposed model was ready to be implemented, he remarked that CME Group would promptly implement the proposal in order to help their customers to transition to this new market structure.
• Rep. Cloud asked Mr. Duffy to elaborate on his concerns regarding the FTX proposal and weekend trading.
  • Mr. Duffy remarked that many derivatives and futures users (including many farmers) desired to have a day off from trading. He stated that these users did not want to always face the prospect of their positions being auto-liquidated.
• Rep. Cloud asked Mr. Bankman-Fried to identify the lost opportunities that would arise from a CFTC rejection of the FTX proposal.
  • Mr. Bankman-Fried remarked that the U.S.’s failure to license digital asset platforms would result in the U.S. remaining the only developed country where users could not access deep liquidity in cryptocurrency markets and hedging options. He also stated that the U.S.’s failure to license digital asset platforms would result in the U.S. remaining the only developed country where there would exist little oversight of the digital asset marketplace. He further asserted that the U.S.’s failure to license digital asset platforms would result in the digital assets industry continuing to grow abroad (as opposed to domestically). He cautioned that this dynamic could result in foreign currencies becoming the base currencies for the world’s cryptocurrency ecosystem. He concluded that the aforementioned developments would harm both U.S. consumers and the U.S. economy.
• Rep. Cloud acknowledged that his question period time had expired.

Rep. Al Lawson (D-FL):

• Rep. Lawson noted how Mr. Bankman-Fried had told the Committee that FTX would use real-time liquidation features to prevent the buildup of risk in the portfolios of their customers. He asked Mr. Bankman-Fried to address how this liquidation and risk management would impact market risks and asset volatility (especially during periods of market uncertainty).
  • Mr. Bankman-Fried remarked that derivatives markets could help to buffer and reduce volatility and add liquidity. He stated however that derivatives markets could also exacerbate volatility under some circumstances. He contended that FTX’s proposed model would help to reduce volatility and increase liquidity. He elaborated that FTX’s proposed model would have precise knowledge of the levels of collateral within the market and possess a fast margin engine that could swiftly respond to volatility. He commented that these features would enable the avoidance of premature liquidations of positions while also ensuring that poor performing positions would not jeopardize the accounts of their users. He asserted that it was more difficult to protect against market and systemic risks within a less transparent and slower acting risk management system.
• Rep. Lawson then noted how there were concerns that the U.S. lagged other countries in terms of its adoption of digital assets. He asked Mr. Perkins to identify the factors that were preventing the growth of cryptocurrency trading within the U.S. He also asked the witnesses to address how Americans (and particularly farmers) would benefit from new types of trading platforms.
  • Mr. Perkins remarked that the U.S.’s current regulatory structure for derivatives was inadequate to handle the volatility of cryptocurrency products, which was causing a lot of cryptocurrency trading activity to occur outside of the U.S. He stated that FCMs currently lacked sufficient capacity to offer hedging options for cryptocurrency products to their clients. He added that FCMs that did offer hedging options for cryptocurrency products often only provided such options to their largest clients. He remarked that innovative proposals (such as direct clearing models) would promote inclusion and competition, which would better enable the hedging of risks. He concluded that the FTX model could prove beneficial.
  • Mr. Lukken disputed the assertion that FCMs lacked sufficient capacity to offer hedging options for cryptocurrency products to their clients. He stated that there existed many FCMs within the current clearing system that handled retail clients. He also mentioned how there currently existed exchanges that were offering cryptocurrency products.
• Rep. Lawson then asked Mr. Bankman-Fried to indicate whether FTX had mechanisms and programs in place to address the barriers that small and socially disadvantaged farmers faced in using the FTX exchange if the CFTC were to approve the FTX proposal.
  • Mr. Bankman-Fried called it important for the FTX platform to maintain transparency, disclosure, education, suitability, and testing measures and requirements in order to ensure that users would understand the platform’s offerings. He also called it important for disadvantaged communities to be able to access the platform. He testified that FTX offered its full product suite to all users through multiple mediums (e.g., computer, phones, etc.). He further noted how FTX’s platform users were overrepresented in minority communities.

Full Committee Ranking Member Glenn “GT” Thompson (R-PA):

• Ranking Member Thompson discussed how the CFTC was empowered to use a transparent and principles-driven process to consider any proposals (including the FTX proposal under consideration at the hearing). He expressed his hope that the hearing’s discussions would help to inform the CFTC’s consideration of the FTX proposal. He remarked that the CFTC must ensure that stakeholders and the public would have input into the consideration of the FTX proposal. He stated that the Committee should play an oversight role (as opposed to a decision making role) with respect to the CFTC. He asserted that the Committee should intervene with the CFTC if the CFTC were to deviate from its prescribed process for considering proposals. He remarked however that the CFTC has not deviated from its prescribed process in considering the FTX proposal so far. He noted that the CFTC had provided numerous opportunities for public comment and input regarding the FTX proposal and highlighted how the CFTC would soon hold a public roundtable on the proposal. He also discussed how the CFTC’s jurisdiction had expanded over the years beyond agriculture commodities into other types of commodities. He expressed confidence in the CFTC’s ability to continue their informed and transparent review of the FTX proposal (and other proposals). He lastly called on Committee Members to support the bipartisan Digital Commodity Exchange Act of 2022. He stated that this legislation would establish effective and defined oversight of digital commodities.

 Full Committee Chairman David Scott (D-GA):

• Chairman Scott remarked that the Committee must ensure that the U.S. had sufficient protections for clearinghouses given their importance in managing the growing derivatives market. He also noted how foreign adversaries were currently looking for ways to weaken the U.S. financial system, which underscored the importance of securing the U.S. derivatives market. He discussed how cryptocurrencies were nascent and growing and stated that policymakers must address the vulnerabilities and volatility associated with cryptocurrencies.