CFTC Staff Reminds DCOs of Compliance Obligations on Digital Assets
The CFTC Division of Clearing and Risk staff ("DCR") reminded derivatives clearing organizations ("DCOs") of the heightened compliance risks to those offering digital asset-related products.
In an advisory memorandum titled: "Risks Associated with Expansion of DCO Clearing of Digital Assets," DCR responded to the growing interest among DCOs in expanding their clearing activities to include digital assets. DCR advised DCO registrants and applicants to expect increased emphasis on potential risks as well as DCO core principles related to system safeguards, physical settlement procedures, and conflicts of interest, "when expanding lines of business, changing business models, or offering new and novel products." DCR said that it expects DCOs and applicants "to actively identify new, evolving, or unique risks and implement risk mitigation measures tailored to the risks that these products or clearing-structure changes may present."
Specifically, DCR indicated that it will emphasize compliance with systems safeguards requirements under Part 39, and that clearinghouses that use affiliated services or entities or other models that involve conflicts of interest should expect DCR to enforce rules to minimize and resolve any such conflicts. Further, for clearinghouses offering physical delivery of digital assets, DCR said that it will review whether firms have adequately identified and managed their risks and obligations.
CFTC Commissioner Kristin N. Johnson suggested that the advisory memorandum shows the need for the CFTC to commence formal rulemaking "that invites a comprehensive evaluation of 'heightened' risks associated with certain crypto clearing activities, ensures parallel customer protections apply across our markets for similar clearing activities, and proposes appropriate measures to mitigate unique as well as traditional risks." Commissioner Johnson urged rulemaking that incorporates the "same activity, same risk, same regulation" approach and addresses: (i) conflicts of interest arising from vertical integration of activities and functions, (ii) custody and client asset protections, (iii) operational and technological risks, specifically cyber-risks, and (iv) market manipulation and fraud.
Commentary
While notable, the advisory should not be particularly surprising given the general thrust of US regulators approach to digital assets. At its core, the staff is indicating that digital asset products offered by CFTC registrants (and applicants to be registrants) will receive heightened scrutiny. And while people may disagree with Commissioner Johnson on the right approach for the actual rules, she is correct in stating that it would be appropriate for the CFTC to adopt rules that identify what is needed to address the ("heightened") risks associated with clearing digital assets, rather than rely on more general supervisory authority.