FTX Proposes Derivatives Rule Change, BoE Official Warns of Risks

FTX Proposes Derivatives Rule Change, BoE Official Warns of Risks

• FTX recently proposed to allow the trading platform to clear margin derivatives trades to customers directly.
• Bank of England officials are worried about this proposal.
• FTX president tweeted that there is a similar risk between both systems.

FTX recently proposed to allow the trading platform to clear margin derivatives trades directly to customers. The existing derivatives clearing organization license held by FTX U.S. Derivatives, according to US President Brett Harrison, mandates complete collateralization of derivative holdings through an intermediary.

With their proposal, FTX hopes to change that to let both retail and institutional clients trade margin derivatives directly with one another. But the proposal was taken cautiously by the Bank of England official, Jon Cunliffe.

He cautioned that taking out the middleman in financial trading should not create the risks and shortfalls that caused the meltdown in 2008. Cunliffe cautioned against the type of modifications to U.S. trading laws that the cryptocurrency exchange FTX.US has requested because they would permit direct-to-consumer derivatives trades rather than collateralizing holdings through a middleman.

The FTX proposal would settle the derivatives risk in real-time. Cunliffe was quoted saying:

Margin is there to protect against counterparty credit risk. If the transaction happens in a nanosecond, then you have a nanosecond’s worth of counterparty credit risk.

To back up the submitted proposal, Brett Harisson, President of FTX, stated that the proposed margin system by FTX and the traditional margining systems have similar operational risks. He clarified that both the systems have heavily regulated central counterparties.

Overall our model is risk-reducing.

— Brett Harrison (@Brett_FTX) June 22, 2022

Brett Harrison pointed out the main difference: FTX will compute the margin in real-time. This, he claims, will further centralize control. This also avoids the need to rely on other intermediaries. He stated that FTX mode is overall risk-reducing.

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