Comment Text:
This comment is to support FTX US Derivatives’s request to amend their DCO Registration Order. We see three main reasons to support this request.
Market Competitiveness
In the current market, BTC and ETH futures volumes are dominated by the CME. The CME is a “single source” for traders and market participants looking to get exposure to these products within the US regulatory umbrella. By allowing FTX US Derivatives to compete with the CME in these markets, market participants will have access to a quality platform with a variety of innovative features. FTX US’s growth in the last year indicates there is strong demand for innovation in this respect.
Furthermore, the current US derivatives market structure relies heavily on large incumbent banks and other financial institutions to intermediate trades. This intermediation represents a tax levied on the US consumer by these entrenched institutions. By allowing FTX’s application, customers will have more direct access to these markets, which will in turn reduce the influence of large incumbent financial institutions and reduce systemic risk from their current derivatives oligopoly.
Improved Risk Model
Current risk models used in these markets do not have 24 hour coverage. These risk models stop their evaluations at nights and on weekends. This represents a large systemic risk for products which trade 24 hours a day, 7 days a week. One need only look at the recent events on the London Metals Exchange nickel markets to see that the risk system based on counterparty credit broke down in a serious manner. This required the LME to essentially “pick winners” in order to maintain solvency.
FTX’s proposal, based on the idea of on-platform collateral, does not suffer from these sorts of failure modes. Furthermore, FTX’s proven liquidation model, based on a gradual liquidation instead of all-or-nothing position liquidation, creates more stability in the market. This liquidation system has been proven in markets with very large swings and volatilities, and represents a best-in-class solution for the derivatives collateral and liquidation. We are among many liquidity providers who would strongly welcome a 24/7 risk system to go along with the 24/7 trading that’s already the norm in spot markets.
Market Efficiency
One of the great benefits of our market-based system is the information it provides to the world. One could imagine a system where only the entities transacting in a market have access to the price and volume information created. However the CFTC and SEC have long been champions of open access to financial information. This “information exhaust” represents one of the most important free benefits of a well-functioning market. In economics, the fundamental problem to solve is the proper allocation of scarce resources. Market prices are the most important component of solving this allocation problem.
One of the best ways to increase competitiveness in financial markets is to democratize access. By approving FTX’s request, the CFTC can ensure that the US continues to be the preferred place where people will transact, discover prices, and continue to provide this informational benefit to the world.
