CFTC Issues FAQs on Crypto Asset Collateral and Margin Requirements

The CFTC Market Participants Division and Division of Clearing and Risk (collectively, the "Divisions") issued guidance answering frequently asked questions ("FAQs") concerning registrant and registered entity activities relating to crypto assets and blockchain technologies.

The Divisions stated that the FAQs provide additional guidance on the application of CFTC Staff Letters 25-39 and 26-05 regarding the use of certain crypto assets as collateral in derivatives markets.

Among other things, the Divisions answered questions on:

• Customer Margin and Deficits: The Divisions stated that Futures Commission Merchants ("FCMs") relying on Staff Letter 26-05 may apply the value of a customer’s non-security crypto assets, including payment stablecoins, "to secure the customer’s debit or deficit account balance," subject to applicable haircuts.
• Residual Interest and Customer Funds: The Divisions clarified that FCMs may deposit "proprietary payment stablecoins as residual interest in customer segregated accounts," provided they impose "a capital charge of at least 2% of the market value" of such stablecoins. However, the Divisions noted that FCMs are prohibited from depositing other proprietary crypto assets, such as Bitcoin or Ether, as residual interest and may not invest customer funds in payment stablecoins.
• Uncleared Swaps Margin: The Divisions stated that swap dealers cannot exchange crypto assets as initial or variation margin for uncleared swaps. However, consistent with Staff Letter 25-39, dealers may exchange tokenized forms of traditional eligible collateral assets, provided that such assets satisfy applicable regulatory requirements and "grant[] the holder with legal and economic rights that are the same or functionally equivalent to the rights that come with the asset in its traditional form."
• Regulatory Capital: Addressing FCM regulatory capital, the Divisions stated they would not object if an FCM applies a minimum 20% capital charge for proprietary inventory positions in Bitcoin and Ether, and a 2% capital charge for payment stablecoins. The Divisions noted this aligns the CFTC's haircut framework with the SEC's approach for securities broker-dealers.
• DCO Margin Requirements: The Divisions confirmed that Derivatives Clearing Organizations ("DCOs") may accept crypto assets, including payment stablecoins, as initial margin for cleared transactions, provided the assets present minimal credit, market, and liquidity risks. DCOs must set and evaluate appropriate haircuts on at least a monthly basis.
• FCM Reliance Conditions: The Divisions explained that, before relying on Staff Letter 26-05, an FCM must file a notice via the WinJammer system. During an initial three-month period, FCMs may accept only payment stablecoins, bitcoin, or ether as margin collateral from customers and "may deposit only proprietary payment stablecoins as residual interest in futures, foreign futures, and cleared swaps customer accounts." During that initial three-month period, an FCM must also provide prompt written notice (through the WinJammer system) of any "significant" operational, systems, or cybersecurity incident affecting the use of crypto assets as customer margin collateral. An FCM must also file weekly reports on crypto assets held in customer accounts. The FAQs clarifiy that after the initial three-month period, the aforementioned specific limitations and reporting obligations expire, although FCMs may accept other crypto assets only if they continue to satisfy the applicable conditions of Staff Letter 26-05.