CLEARANCE AND SETTLEMENT—CFTC issues staff advisory on the risks associated with expansion of DCO clearing of digital assets - 01 June 2023

The CFTC’s Division of Clearing and Risk issued a staff advisory on review of risks associated with expansion of DCO clearing of digital assets.

The CFTC’s Division of Clearing and Risk (DCR) issued a staff advisory on the risks associated with the expansion of Derivatives Clearing Organization (DCO) clearing of digital assets. In the past several years, DCR has observed increased interest by DCOs and DCO applicants in expanding the types of products cleared and business lines, clearing models, and services DCOs offer, including related to digital assets (CFTC Letter No. 23-07, May 30, 2023).

The advisory “reminds registrants and applicants that when expanding lines of business, changing business models, or offering new and novel products, DCR will remain focused on the potentially heightened risks that may be associated with certain of those clearing activities. DCR expects DCOs and applicants to actively identify new, evolving, or unique risks and implement risk mitigation measures tailored to the risks that these products or clearing-structure changes may present.”

DCO registrants and applicants should expect that DCR will be placing emphasis on the potential risks and DCO core principles related to system safeguards, physical settlement procedures, and conflicts of interest.

Statement of Commissioner Kristin Johnson. Commissioner Johnson called for the CFTC to initiate a formal rulemaking process for CFTC-registered DCOs engaged in crypto or digital asset clearing activities. According to Johnson, proposed rules should address: 1) conflicts of interest arising from vertical integration of activities and functions; 2) custody and client asset protection; 3) operational and technological risk, specifically cyber-risks; and 4) market manipulation and fraud.

This is CFTC Letter No. 23-07.

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