FCM Guidance for Crypto Investments

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Photo credits to Scott Graham

Today the Commodity Futures Trading Commission’s (CFTC) Division of Swap Dealer and Intermediary Oversight (DSIO) published guidance regarding the deposit of virtual currencies by customers with futures commission merchants (FCMs) to margin customer transactions. This is a significant development for the cryptocurrency futures market, and for ErisX.

The Division’s guidance confirms that FCMs that facilitate customer transactions in virtual currencies on an approved clearing organization, and adhere to the guidance will:

  • Not be subject to additional capital requirements
  • Have minimal implications on FCM segregation statements

“We know that FCMs have been waiting for this guidance and we are excited to see the CFTC put this framework in place. FCMs now have the clarity they need to facilitate customer transactions in virtual currencies, maintain compliance with CFTC regulations, and prove compliance in examinations by their DSRO under the Joint Audit Committee program,” said Thomas Chippas, CEO of ErisX.

“The challenge of working with this fast moving asset class is understanding how these transactions affect each entity,” said Jay Schulman, national blockchain services leader with RSM US LLP (RSM), the nation’s leading provider of audit, tax and consulting services focused on the middle market, and audit and tax provider for ErisX. “With the recent AICPA guidance last month and now the CFTC guidance this month, FCMs now have guidelines to working with digital assets.”

The DSIO determination that virtual currencies are an acceptable form of collateral and the recognition that a Derivatives Clearing Organization (DCO), among other depositories, is an acceptable location for virtual currency storage demonstrates the applicability of known futures workflows to virtual currency. Superior institutional workflows and technology, coupled with our insurance to protect customers from loss related to theft and/or hacking, ErisX is well positioned to provide crypto market access to price transparency, liquidity, clearing, settlement and custody under the CFTC’s proposed framework.

In December 2019, ErisX self-certified its rules to permit FCMs to onboard and provide intermediation to their clients for physically settled bitcoin futures, ether futures, and our financially settled Bounded Futures contract which are expected to launch later this month.

Specifically, the Guidance provides:

  • “Virtual Currency held as customer funds by an FCM” can be deposited with a clearing organization that clears customer contracts in virtual currencies (amongst other “Depositories”). ErisX is an approved Depository for this purpose and we maintain workflows that allow customers to deposit funds directly into the FCMs’ customer accounts at the clearing house.
  • FCMs must deposit customer funds into a properly named account with an appropriately written acknowledgment letter from the Depository. To protect customer funds and assets, ErisX is obligated to completely segregate customer assets from its own assets by holding them in a segregated customer account, separate from the funds of the Exchange. This is not only required by CFTC regulations for futures trading but also state requirements related to Money Transmitter licenses.
  • Virtual currency must be available for withdrawal from the Depository upon demand of the FCM. ErisX approves withdrawals between 7 am and 7 pm cst Monday — Friday.
  • Virtual currencies belonging to the customer are reported by the FCM at fair market value. To meet our institutional customer’s requirements, ErisX provides statements and reports with positions, balances and a value based on our underlying spot market.
  • Restrictions apply on the FCMs’ use of virtual currencies for other assets, and for use in targeted or residual interest requirements. Furthermore the Division makes clear that virtual currencies are not a permitted investment under Commission regulation 1.25.

The full guidance document is available here.

ErisX provides workflows to comply with the Division’s guidance and is happy to help FCMs comply with the CFTC’s framework in their search for secure and transparent crypto liquidity for their customers. For more information about ErisX please visit www.ErisX.com or email us at info@erisx.com

https://www.erisx.com/disclaimer/

Licenses and Registrations

ErisX Futures are offered through Eris Exchange, LLC, a Commodity Futures Trading Commission (CFTC) registered Designated Contract Market (DCM) and Eris Clearing, LLC, a registered Derivatives Clearing Organization (DCO). The CFTC does not have regulatory oversight authority over virtual currency products including spot market trading of virtual currencies. ErisX Spot Market is not licensed, approved or registered with the CFTC and transactions on the ErisX Spot Market are not subject to CFTC rules, regulations or regulatory oversight. ErisX Spot Market may be subject to certain state licensing requirements and operates in NY pursuant to Eris Clearing’s license to engage in virtual currency business activity by the New York State Department of Financial Services.

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