CFTC Staff Sets Expectations for 24/7 Trading and Clearing
The CFTC advised designated contract markets ("DCMs,") swap execution facilities ("SEFs,") derivatives clearing organizations ("DCOs") and futures commission merchants ("FCMs") seeking to extend the hours for trading and clearing that they should submit comprehensive explanations of proposed changes, expected effects on risk and mitigation strategies and must demonstrate compliance with all relevant rules.
In an Advisory, staff defined "24/7" as trading that is active for the majority of weekend and holiday hours together with associated clearing. Staff said increased interest in 24/7 derivatives trading was accelerated by evolutions in market technology, including blockchain networks and decentralized infrastructure, alternate forms of collateral such as stablecoins and crypto assets, and retail access through smartphones. They noted that some asset classes are better suited for continuous operations than others: e.g. derivatives referencing crypto assets may be well-suited given their digital infrastructure and global reach, while agricultural and other regional markets may be less suited because of their customer bases, regional nature and specialized trading and hedging practices.
On trading, the Division of Market Oversight said DCMs and SEFs should avoid offering contracts that settle during off-peak periods such as overnight and weekends in the underlying cash market. They warned that 24/7 trading for certain markets or products could reduce liquidity, increase volatility, widen bid-ask spreads and create greater opportunities for market manipulation. Trading platforms must demonstrate they can conduct real-time monitoring and maintain surveillance for abusive trading practices on a continuous basis, and must adopt risk-control mechanisms (including market pauses and halts) appropriate to a continuous trading environment. Staff emphasized that system safeguards, including elimination of single points of failure, redundant infrastructure, real-time data synchronization, business-continuity and disaster-recovery plans are necessary, and that compliance staffing and resources must be increased to handle the overnight and weekend coverage demands.
On clearing, the Division of Clearing and Risk identified three categories of clearing models that may accompany 24/7 trading: (i) those in which collateral calls continue to occur only during traditional market hours (the current U.S. derivatives 24/7 model), (ii) those in which participants may opt into weekend collateral posting, and (iii) those in which weekend collateral posting is required. Under the CEA's Core Principle B (financial resources) and Core Principle D (risk management), the staff said derivatives clearing organizations must demonstrate sufficient resources to meet obligations continuously across multi-day bank closures, must consider whether to pre-fund initial margin or maintain additional liquidity buffers for positions taken during extended hours, and must keep eligible collateral restricted to types with minimal credit, market and liquidity risks. For stablecoins and other crypto assets used as collateral, the staff said the distinction between weekend and weekday risks may be less acute but other risks remain to be analyzed, pointing to previous guidance on tokenized collateral. The staff said weekend clearing models, particularly those that mandate weekend collateral posting, "may be neither prudent nor viable" for some markets, especially those concentrated by region or time of day or where end users face high operational or liquidity costs in weekend collateral movement.
On intermediation, the Market Participants Division said extended trading hours without weekend settlement may cause futures commission merchants to violate customer-fund segregation requirements under the Commodity Exchange Act and Commission Regulations - and possibly capital requirements if a relevant market becomes significantly volatile. FCMs intermediating 24/7 transactions are expected to assess and adjust the targeted amount of residual interest they maintain in segregated accounts, consider customer prefunding, enhance risk-management programs to address weekend, holiday and overnight trading, including auto-liquidation mechanics and the risk that sudden price moves trigger cascading liquidations, and provide additional disclosures of those risks to customers.