CFTC Opened FTX’s Direct-to-Retail Clearing Plan for Comment

The Commodity Futures Trading Commission opened public comment on March 10, 2022 on a request that could have redrawn the route between retail customers and U.S. derivatives clearing. LedgerX LLC, doing business as FTX US Derivatives, sought permission to clear margined products directly for retail participants without requiring a futures commission merchant, or FCM, between the customer and the clearinghouse.

The distinction was consequential. FTX already operated a non-intermediated model for fully collateralized futures and options on futures, meaning collateral covered the potential loss when a trade was opened. The proposed amendment would extend direct clearing to margined products, where collateral covers only part of possible losses. That would introduce default and liquidation risks that a fully collateralized structure largely avoids.

The CFTC’s action was a request for evidence and policy views, not an approval. The initial comment deadline was April 11, 2022.

A challenge to the standard clearing chain

The CFTC said 15 derivatives clearing organizations were then registered with the agency. Most combined three features: margined products, clearing through FCM intermediaries and mutualized default losses.

Under that structure, most customers clear through an FCM that is itself a member of the clearinghouse and guarantees customer obligations to it. Clearing-member resources can also support a guaranty fund, spreading some losses after a default. FTX’s design proposed a different allocation of functions: retail participants would become direct clearing members, while the platform would monitor collateral, conduct liquidations and supply its own default resources.

The agency identified four DCOs, including FTX, that cleared only fully collateralized trades and used non-intermediated models. It also identified ICE NGX as a non-intermediated clearer of margined products, but said ICE NGX’s financial thresholds excluded retail participation. The combination of direct retail access and margin therefore made FTX’s request structurally unusual.

Automated margining was the core mechanism

According to the CFTC’s request-for-comment document, FTX planned to recalculate each participant’s margin level every 30 seconds. If deposited collateral fell below maintenance margin, an automated system would liquidate 10% of the portfolio at a time by placing offsetting orders on the central limit order book. The process would stop when collateral again exceeded the maintenance requirement.

Below a separate full-liquidation threshold, FTX proposed transferring the remaining positions to prearranged backstop liquidity providers. It also proposed a $250 million guaranty fund financed with its own capital rather than mutualizing default losses among participants.

Those were proposal terms, not tested regulatory findings. The CFTC asked whether constant liquidation could operate fairly in stressed markets, whether multiple liquidations might cascade through prices, and whether adequate liquidity would exist around the clock. It also asked how the clearinghouse should size resources for extreme but plausible conditions.

Customer protections were unresolved

Removing the FCM also removed a regulated intermediary that normally performs risk, reporting and customer-protection functions. The CFTC noted that collateral in the proposed model would not receive the same statutory segregation required for FCM customer funds under section 4d of the Commodity Exchange Act. FTX’s registration order instead required participant funds to be held as “member property” under the Bankruptcy Code.

The agency asked whether that protection was sufficient and whether direct participants should receive safeguards comparable to FCM customers, including risk disclosures, trade confirmations, monthly statements, restrictions on investing participant funds and daily reporting.

The policy choice was therefore broader than whether one crypto company could list leveraged contracts. Approval could have compressed exchange, clearing, brokerage and automated risk management into a more vertically integrated path. That might reduce intermediation costs, but it could also concentrate operational, liquidity and customer-protection responsibilities in the clearinghouse. On March 10, neither outcome had been established.

Later context

CFTC records show that LedgerX withdrew the request on November 11, 2022. The agency subsequently stated that the application had not been approved; that later result does not change the fact that March 10 opened a live market-structure review.