Monday, December 5 2022

Key ideas:

  • FTX wants to become a “futures broker” to handle derivatives internally.
  • Goldman plans to integrate some of the crypto exchange’s products.
  • US regulators are highly skeptical of the deal and anything crypto-related.

Goldman Sachs is in talks with the US arm of cryptocurrency exchange FTX to integrate some of its derivative products.

Citing a “person familiar with the matter” on June 1, Barron’s reported that FTX was seeking a license amendment from the Commodity Futures Trading Commission (CFTC). The enhanced license will allow the exchange to act as an intermediary for trading leveraged derivatives, he added.

The exchange will handle collateral and margin requirements internally when borrowed money is used for trading. Currently, brokerages acting as “futures commissioners” (FCMs) fulfill this role.

FCM’s ambitions

Derivatives are financial contracts between two or more parties deriving their value from an underlying asset, cryptocurrency, in the case of FTX (FTT). They can consist of futures, options, futures and swaps.

Goldman (GS) is one of the FCMs in talks with FTX as they prepare for what the exchange offers, according to FTX US President Brett Harrison, who told the outlet:

“We have several FCMs already committed to integrating technologically with the exchange. There are several big ones that you can probably name.

Goldman’s integration with FTX could introduce several additional services, another person familiar with the matter said. These could include “direct trading in futures contracts, introducing clients and on-ramping to the exchange, or providing capital top-ups to clients”, they added.

There could, however, be a regulatory rollback. The main US financial regulators, the CFTC and the SEC (Securities and Exchange Commission) are highly skeptical of digital assets and any exchanges that deal in them.

The CFTC has previously said that FTX’s ambitions to become an FCM warrant scrutiny. The company’s proposal to bring derivatives trading in-house threatens a market dominated by big investment banks such as Goldman.

Market Volatility Concerns

The Futures Industry Association, which represents derivatives brokers, said the FTX proposal could “exacerbate financial instability at a time of heightened market volatility.”

High leverage traders have been blamed for huge price swings and volatility in the crypto markets. Large events can lead to the liquidation of a cascade of leveraged trades, causing the price of the underlying asset to fall very quickly.

FTX argues that the proposed embedded derivatives model would improve market stability. It holds client collateral, calculates margin requirements every 30 seconds, and automatically liquidates positions rather than waiting overnight.

It claims the system has been “battle tested” on its international exchange, which has much higher volumes and liquidity than the US version.

FTX.US currently has around $200 million in spot daily trading volume, while the international exchange has over $2 billion according to CoinGecko.

Harrison believes the FTX model would free up capital for brokerages acting as FCMs, leading to greater revenue.


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