The US Commodity Futures Trading Commission's Global Markets Advisory Committee held a virtual public meeting on 21 November that featured a presentation on the potential to use tokenized assets as collateral in derivatives trading. The presentation focused on the opportunities to improve operational efficiency and mitigate risks in the markets. Ultimately, the advisory committee adopted a report and a series of recommendations by a vote of 27 yeas, 4 abstentions and 0 nays.
Of note, one of the three recommendations stated that “no new rules or guidance should be necessary" in order to permit the use of distributed ledger technology to hold or transfer non-cash collateral in CFTC-regulated markets.
The Global Markets Advisory Committee is one of five advisory committees that serve as a resource for the CFTC commissioners and staff. Although these committees have no formal rulemaking powers, their meetings provide a platform for market participants and policy experts to spotlight issues and provide feedback for the agency.
GMAC endorses recommendations
Allison Parent, executive director, Global Financial Markets Association, and Thomas Sullivan, a managing director at Societe Generale who is the bank's head of market access and product development for digital assets in the Americas, presented a report and series of recommendations related to tokenization – and specifically the use of non-cash collateral through distributed ledger technology. Parent and Sullivan walked through the current state of non-cash collateral adoption, as well as some of the existing use cases, opportunities and limitations.
The full GMAC adopted three recommendations with no opposition. Several members of the advisory committee, including Chris Zuehlke, partner and global head of Cumberland at DRW, expressed strong support for the recommendations.
Recommendations:
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Recommendation 1: Where DLT-based infrastructure is used solely as part of a financial institution’s internal books and records, then a CFTC registrant should be able to rely on its normal processes to assess information security and other relevant operational risks, whether those risks arise from the registrant’s own use of DLT-based infrastructure for its internal books and records or from the use of such infrastructure by a service provider, such as a custodian, for the service provider’s internal books and records.
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Recommendation 2: Where a CFTC registrant looks to accept eligible non-cash collateral in tokenized form, it should be able to satisfy relevant requirements by applying its existing policies, procedures and practices in the following areas: legal enforceability, segregation and custody arrangements, credit and custodial risk, and operational risk.
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Recommendation 3: Because use of DLT for these purposes need not affect the character of the relevant asset, and because registrants already have extensive policies, procedures, practices and processes to address use of new technologies and infrastructures, no new rules or guidance should be necessary to permit such use.
Utility Token Workstream
The advisory committee meeting concluded with a presentation by Chris Perkins, president of CoinFund, on behalf of the Digital Asset Markets Subcommittee. Perkins summarized the subcommittee’s work on defining utility tokens and developing guidance for market participants. While no formal recommendations related to this workstream were adopted at this meeting, Perkins voiced his support for promoting cooperation between the CFTC and the Securities and Exchange Commission by reactivating the CFTC-SEC Joint Advisory Committee on Emerging Regulatory Issues. He noted a formal committee could encourage dialogue and coordination between the SEC and CFTC as they address jurisdictional issues related to digital assets and utility tokens, among other items.
Additional Documents and Materials
Global Market Structure Subcommittee Recommendations – Use of Non-Cash Collateral Through Use of Distributed Ledger Technology
