CFTC clears path for crypto in derivatives: What you need to know

The U.S. Commodity Futures Trading Commission (CFTC) has provided more details on its pilot program that allows cryptocurrencies to be used as collateral in derivatives markets. The new guidance was issued in response to frequently asked questions about the program that began last year.

Summary

• CFTC allows crypto as collateral in derivatives, following a pilot program.
• FCMs must apply a 20% capital charge for Bitcoin and Ether positions.
• Crypto cannot be used for uncleared swaps, but is allowed for cleared transactions.

The CFTC’s recent notice outlines the procedures for futures commission merchants (FCMs) wishing to participate in the pilot program. FCMs are required to file a notice with the Market Participants Division and specify the date they will begin accepting crypto assets as margin collateral. This development is part of the CFTC’s ongoing efforts to integrate crypto assets into traditional financial markets.

The CFTC’s pilot allows for the use of crypto as collateral in derivatives transactions, a move that aligns with the crypto industry’s push for 24/7 trading and immediate settlement. The guidance issued in December clarified which tokenized assets can be used as collateral and how they should be valued and calculated for trading positions.

Capital Charges and Aligning with SEC Guidelines

The CFTC made it clear that its guidance on capital charges would align with the Securities and Exchange Commission (SEC). Futures commission merchants must apply a 20% capital charge for positions in Bitcoin and Ether, while stablecoins will carry a 2% charge. This move is aimed at ensuring that both agencies maintain consistent regulatory approaches to crypto.

During the first three months of the pilot, FCMs can only accept Bitcoin, Ether, and stablecoins as collateral. They are also required to file weekly reports detailing the total amount of crypto held across customer account types. After three months, other cryptocurrencies can be accepted as collateral, and the reporting requirements will be lifted.

The CFTC also specified that proprietary payment stablecoins are the only ones that can be deposited as residual interest in customer segregated accounts. Additionally, the use of crypto and stablecoins as collateral for uncleared swaps is prohibited.

Crypto assets cannot be used as collateral for uncleared swaps. However, derivatives clearing organizations can accept Bitcoin, Ether, and stablecoins as initial margin for cleared transactions if the assets meet CFTC’s credit, market, and liquidity risk requirements.