CFTC to Propose Strengthening Regulations to Safeguard Customer Funds

The Commodity Futures Trading Commission (CFTC) is reportedly working on a draft proposal to enhance regulatory defenses and protect client funds.

Coming in response to last year’s collapse of crypto giant FTX, the proposal aims to expand the scope of existing regulations to include exchanges that allow customers to trade without going through a brokerage, Bloomberg reported Thursday (Nov. 9).

FTX’s subsidiary, LedgerX, which was overseen by the CFTC, successfully safeguarded customer funds by separating them from company assets, according to the report. This separation of assets prevented FTX from accessing customer funds, and the CFTC required LedgerX to maintain this separation as a condition for offering fully collateral-backed crypto derivatives directly to customers.

Kristin Johnson, a member of the CFTC, told Bloomberg that the rules requiring segregation of customer assets should apply to any firms using similar direct-to-customer models, regardless of the type of derivatives offered. The goal is to prevent the misuse or loss of customer funds and avoid future crises like the collapse of FTX.

The CFTC is facing pressure to act swiftly and implement rules that protect customer funds, particularly in complex financial products such as leveraged crypto derivatives transactions, according to the report. The proposed rules that are now being drafted would ensure parallel protections for customer funds and close the gap for retail customers.

While the CFTC’s proposal has not been made public yet, it is part of a broader response by U.S. authorities to address the fallout from FTX’s collapse, the report said. Former executives of FTX, including its chief executive Sam Bankman-Fried, faced legal action, with Bankman-Fried being found guilty of fraud and conspiracy.

Unlike FTX, LedgerX emerged as a solvent entity after the collapse and was sold off earlier this year, per the report. The CFTC had previously granted LedgerX approval to offer derivatives contracts fully backed by collateral directly to retail customers, with the explicit requirement to maintain separate funds for clearing members.

During a December 2022 appearance before the Senate Agriculture Committee in Washington, CFTC Chairman Rostin Behnam noted that while most of the media coverage about FTX focused on 130 affiliated entities that filed for bankruptcy, there was less focus on LedgerX — the entity registered with and overseen by the CFTC.

“The customer property at LedgerX — the CFTC-regulated entity — has remained exactly where it should be, segregated and secure,” Behnam said.