Slippery Slope: Let’s Let Markets Decide On New Contracts

Jim Kharouf

Jim Kharouf


Do exchanges need further regulation on the contracts they launch? That is the question the Commodity Futures Trading Commission is addressing now with the so-called self-certification process for new contracts.

Exchanges have not faced this type of scrutiny over the launch of a new product in recent history until Bitcoin. Several new contract ideas have been squashed by legislation or regulation, including movie futures and onion futures way back when. But for the most part, exchanges are allowed to introduce new contracts as they wish and ultimately let the markets decide on whether or not they offer enough value to trade them, offer them to clients or clear them.

There are great contract ideas that do not get market traction and others that do. Was VIX futures a great idea? The market seems to think so. Our how about greenhouse gas/carbon futures? And in the case of Cboe, its CEO and Chairman Ed Tilly recently said they had extensive talks with the CFTC and detailed testing with its clearinghouse, OCC, before launch. They also spoke with end-user customers as well, as every exchange does before a launch.

It is interesting that CFTC Commissioner Rostin Behnam, in a speech before the Market Risk Advisory Committee, noted that “the product self-certification process does NOT provide for public input.” And narrowing focus to the two bitcoin futures contracts, the chairman (Chris Giancarlo) clarified, “Neither statute nor rule would have prevented CME and CFE from launching their new products before public hearings could have been called.”

And so we head toward what the CFTC is calling a new “Heightened Review” process. Rostin said it reconsiders “its historical regulatory approach to new products – in fact, the implementation of the ‘heightened review’ process is a new regulatory approach in and of itself.” He added that he is looking forward to “exploring our options, which I hope will include some parameters for determining when self-certification may not be appropriate, and for determining when such matters are appropriately brought before the Commission.”

This is a slippery slope for a regulator. Just when will greater self-certification scrutiny be necessary? Will it be over Ripple but not Litecoin? Will it be implemented over diamonds but not silicon chips or weather events?

CFTC Chairman [[Christopher Giancarlo]] does not appear to be interested in changing the self-certification process dramatically. In The Wall Street Journal’s ominous headline Rise of Bitcoin Futures Prompts Regulator to Revisit Hands-Off Approach he said “The CFTC’s current product self-certification framework is consistent with public policy that encourages market-driven innovation that has made America’s listed futures markets the envy of the world,” adding, “whatever the market impact of bitcoin futures, I hope it is not to compromise the product self-certification process that has served so well for so long.”

Let’s leave it to the market participants to decide.


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