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.@ftx_us has proposed the first realtime derivatives margining system in the United States. 24x7 margining for 24x7 assets, starting with crypto. today, @CFTC opened up our proposal for public comment:
www.cftc.gov/PressRoom/PressReleases/8499-22
here's why US derivatives margining needs an upgrade:
www.cftc.gov/PressRoom/PressReleases/8499-22
here's why US derivatives margining needs an upgrade:
back before the Great Financial Crisis of 2008, long chains of derivatives obligations (swaps, in particular) built up with little oversight. nobody knew who owed what to whom. risk accumulated in the system too easily.
ex: en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008
that didn't work out too well.
ex: en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008
that didn't work out too well.
Congress passed the Dodd-Frank Act of 2010 to solve this problem by concentrating risk at clearinghouses, known as Derivatives Clearing Organizations (DCOs). now, every buyer and seller faces the DCO directly, instead of each other. the chain is one hop. (honestly, great idea.)
yet even today, there's no real-time measure of how much risk exists in the financial system. the intermediated nature of the traditional financial system makes this hard.
how do you calculate the intertwined probabilities of failed margin calls on a weekend like this past one?
how do you calculate the intertwined probabilities of failed margin calls on a weekend like this past one?
what's the lesson here?
for volatile assets, don’t rely on margin calls to see if people can pay up. consider only posted collateral.
evaluate risk more often. at nights. on weekends. always.
yes, the math is harder. but the FTX US Derivatives risk team is really good at that.
for volatile assets, don’t rely on margin calls to see if people can pay up. consider only posted collateral.
evaluate risk more often. at nights. on weekends. always.
yes, the math is harder. but the FTX US Derivatives risk team is really good at that.
we believe regulators deserve nothing less than a 24x7x365 "dashboard for risk" in the economy. @CFTC, @USTreasury and @federalreserve should be able to login each morning (or at 3am on a Sunday) and see, to the penny or satoshi or wei, the total amount of risk in the system.
this - the DCO backstopping derivatives positions, and transparently reporting on them - is what Dodd-Frank intended. it's what Congress called for, and what the @CFTC has diligently worked to implement since 2010 (and have done a fantastic job at, by the way).
what's been hard is letting go of tradition. in the pre-Internet era, it was pretty hard for farmers to get in touch with futures exchanges in Chicago to margin and place orders.
so, people set up brokerage shops, to provide easier access through friendly faces.
so, people set up brokerage shops, to provide easier access through friendly faces.
we still have the friendly faces - they're just sitting directly at the exchange now, shipping & helping customers (@Brett_FTXUS is runs @ftx_us from our HQ in Chicago, where this industry grew up).
but there are some key improvements, and @CFTC would like comments on them.
but there are some key improvements, and @CFTC would like comments on them.
at FTX US Derivatives, we don't have margin calls: your credit comes from your collateral on our platform, and nothing else.
we also don't have mandatory intermediation, so we're not exposed to default risk from lesser-capitalized entities with obligations external to our DCO.
we also don't have mandatory intermediation, so we're not exposed to default risk from lesser-capitalized entities with obligations external to our DCO.
we don't have recourse-based margin lending, where retail traders can lose their shirt (or their house) betting the farm on wild derivatives positions.
you have to have collateral to trade, period. this reduces the amount of hard-to-track credit in the system.
we see all risk.
you have to have collateral to trade, period. this reduces the amount of hard-to-track credit in the system.
we see all risk.
finally, we don't liquidate your entire position all at once. agricultural users of existing US derivatives products often find their futures positions completely wiped out after missing a margin call.
we liquidate 10% at a time, and only until you're above water again.
we liquidate 10% at a time, and only until you're above water again.
these partial liquidations make FTX a fundamentally better place to trade, sure.
but there’s a bigger picture with policy implications.
the more often we perform these itty-bitty step-wise liquidations, the less risk builds up in the system.
but there’s a bigger picture with policy implications.
the more often we perform these itty-bitty step-wise liquidations, the less risk builds up in the system.
that's important in times like these, where assets trade around the clock.
yet today's US derivatives margining places insufficient burdens onto the DCOs, and instead try to force clearing intermediaries (Futures Commission Merchants, or FCMs) to handle almost all defaults.
yet today's US derivatives margining places insufficient burdens onto the DCOs, and instead try to force clearing intermediaries (Futures Commission Merchants, or FCMs) to handle almost all defaults.
