CFTC Staff Seeks Comment on Direct Clearing by Retail Participants

CFTC staff requested comment on potential issues concerning derivatives clearing organizations ("DCOs") that provide clearing services directly to retail traders without intermediation by futures commission merchants ("FCMs").

Staff explained that the request focuses on retail DCOs, which have become more significant due to "growing interest in ... prediction and ... event-type markets." They said that unlike traditional DCOs where FCMs act as intermediaries and guarantee customer obligations, retail DCOs allow retail participants to become clearing members directly. Retail DCOs operate on a fully collateralized basis, holding at least as much collateral as the full value of contracts to protect against market and counterparty credit risk.

Staff identified several risk management concerns with retail direct clearing. They said that in traditional intermediated models, FCMs perform regulatory and customer protection functions including know-your-customer and anti-money laundering checks, customer fund protections, prohibitions against abusive practices, and participant default management. These responsibilities are either absent or different in nature when retail participants clear directly with a DCO. The staff also raised concerns about emerging hybrid models where retail participants can choose between direct clearing or intermediated clearing through an FCM, or where a single DCO entity provides both fully-collateralized retail direct clearing for some products and leveraged intermediated clearing for others.

The CFTC request posed questions about whether retail DCOs should be required to fulfill all FCM duties, whether retail participants should be required to become customers of affiliated FCMs, how to address conflicts of interest in vertically integrated structures, whether hybrid models create undue risk transfer between participant types, and whether a separate DCO registration sub-category for retail DCOs is needed. The staff also asked whether different reporting requirements should apply to retail DCOs beyond existing CFTC Regulation 39.19 ("DCO Reporting") requirements for daily reports on clearing member positions and collateral.