FTX CEO Sam Bankman-Fried testified Friday before the House Agriculture Committee after a proposal to use automated tools to regulate futures markets.
Amid skepticism, FTX CEO Sam Bankman-Fried made the case for using computers to enforce margin calls on leveraged positions at a hearing in Washington, D.C. on Friday
Bankman-Fried testified in his testimony that the new automated system is healthy for the market.
“This will bring competition and innovation,” he said. “This will bring liquidity to the U.S. market and choice for U.S. consumers.” The new system will replace brokers making margin calls with 24/7 computer service.
“Rather than choosing to liquidate a position prematurely and worry about what will happen over the next two days exposing yourself to systemic risk, you can make real-time, more accurate judgments about the health of your position,” he lobbied.
Another point of view was offered by Terry Duffy, an executive at CME Group, who lamented the potential impact on the market and argued that the current risk framework has been validated to eliminate the need for automation.
“Automated liquidations can increase volatility and create dramatic price swings in volatile times — potentially adding losses on top of losses and destabilizing markets for all participants.”
FIA sees need for human intervention
Duffy responded to a statement issued by the Futures Industry Association (FIA) on May 11, 2022, which stated that they did not know the reliability of the algorithm in mitigating risk, arguing that human intervention was required.
“During market volatility, the immediate liquidation of large players during cascading markets could … increase market volatility and potentially lead to further defaults,” the agency said, adding that they highly value the judgment of financial experts in making liquidation decisions.
Offering leveraged futures means that investors can enter significant positions with a minimal investment (called margin) in the market and borrow the rest from the exchange.
FTX’s new product requires customers to deposit collateral in their FTX accounts to ensure there are sufficient funds to cover their margin.
Currently, futures commission merchants (FCMs) collect margin and ask for more money overnight to back positions or help clients with their own money. FCMs also contribute to intermediaries between buyers and sellers, known as clearing houses, to share losses in the event of a default.
The new automated system will calculate the margin level every 30 seconds, and if the margin becomes too low, it will quickly close out the position or close the position and sell the margin. In the worst case, there will be other backup liquidity providers.
The FIA called FTX’s plan “innovative” and “transformative,” while reminding the CFTC to do its homework before approving the proposal. The CFTC opened the FTX proposal for public comment, with a deadline Wednesday, as a prelude to Friday’s House committee hearing.
Big push for crypto firms to enter futures markets
Major cryptocurrency exchanges such as Coinbase and Crypto.com have been pushing to establish themselves in the highly regulated futures market.
In January, Coinbase agreed to acquire FairX, the Chicago Board of Trade. Last year, FTX US acquired LedgerX.
FTX US’s approach is to acquire a company that has a license to operate in the United States. “In the U.S., cryptocurrency exchanges cannot offer leverage on spot cryptocurrencies without being a regulated futures commission merchant,” said Rosario Ingargiola, head of Bosonic, a cryptocurrency clearing firm that serves institutional investors.
“This is a big reason why you see big crypto exchanges buying [Commodity Futures Trading Commission]- A regulated platform that allows derivatives such as options and futures to be offered to retail clients due to the huge demand for leveraged products in the retail client sector. “
On Friday, Bankman-Fried announced that he had bought a 7.6% stake in Robinhood Markets, which sent shares soaring as high as 33%.
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