Sam Bankman-Fried traveled to Washington this week to advocate for the modernization of American financial services and ran into a problem. Some farmers in the country fear that the billionaire CEO of cryptocurrency exchange FTX is costing them sleep.
Their bedtime concerns were voiced at an all-day meeting of the Commodity Futures Trading Commission, which is considering a proposal by FTX to bring the automated risk management systems it uses into trading 24/7 cryptocurrency in leveraged futures markets where participants take positions. on everything from the direction of stocks to the price of corn.
The FTX plan is taken so seriously by the US derivatives regulator that all five CFTC commissioners attended the meeting, listening to more than six hours of discussions that pitted Bankman-Fried against a range of interested parties – ranging from agricultural groups to such financial services heavyweights as JPMorgan Chase, Goldman Sachs and the CME Group.
The results suggest the road ahead for the FTX plan could be a bumpy one. Bankman-Fried’s insights have clearly captured the imagination of traders entering and exiting markets in search of yield. But major industry players say they remain puzzled by the workings of his system – and farmers have made it clear they want to keep their distance.
Leveraged futures contracts appeal to both adventurous investors and agricultural hedgers because they allow them to take large positions while accumulating a fraction of a trade’s value, called margin. In today’s markets, brokers, known as futures commission merchants, collect margin and ensure clients have enough to back their positions.
The novelty of FTX’s plan is that it would use computer algorithms to replace human intermediaries. Under his system, margin levels would be calculated every 30 seconds of each day and clients would be responsible for keeping enough in their FTX accounts to support their positions.
Failure to do so would trigger the start of an automated liquidation – no matter when. In more serious scenarios, FTX says additional support could come from sources such as “backup liquidity providers” who would agree to take positions in advance as well as a $250 million guarantee fund paid. by FTX.
This type of automated system appeals to derivative players who dream of moving their collateral as quickly as they have taken positions. They see a measure of security in trading around the clock, allowing them to react in real time to the latest disaster or opportunity. For them, the 24/7 nature of crypto trading is a glimpse into the future of financial services.
Farmers’ groups, which carry considerable political clout in Washington, wondered how their members could sleep in such a world. Although FTX currently only deals in cryptocurrency contracts, the CFTC’s approval of its proposal could pave the way for it to deal in other types of futures contracts, potentially bringing it into the agricultural realm.
Nelson Neale, president of CHS Hedging, the futures brokerage arm of a major U.S. agricultural cooperative, told the CFTC meeting that automated overnight liquidation posed a greater threat to farmers who turn to futures markets to hedge their risk than traders. who use these contracts for “speculative” purposes.
“With a self-liquidation system, a crypto trader goes to bed at 11 p.m. and wakes up at 7 a.m. and all of a sudden he’s been kicked out of his position, or liquidated — a bad day to be sure. , but maybe not as bad if we look at the same scenario for the American farmer,” he said.
“He goes to bed with a corn position to cover his physical inventory at 11 p.m., wakes up at 7 a.m., or probably a bit earlier, and he has no position. As a result, the value of its inventory drops considerably. . . He may have loan obligations that he can no longer commit to.
In the face of complaints from the agricultural industry, Bankman-Fried gave ground. While maintaining his position that automated liquidations could prevent bad situations from escalating, he said the FTX approach was better suited to “digitally settled” contracts – such as those for crypto – than trades where physical collateral such as wheat or corn are used.
His rhetorical retreat indicated a possible way forward for the CFTC as it considers the FTX proposal. The derivatives regulator clearly sees something valuable in the plan, having put it out for public comment and then spent an entire day listening to market participants talk about it.
If the CFTC really wants to let FTX experiment with leveraged futures markets, it could limit its activities to 24/7 crypto trading, at least for a set period of time. That way, its proponents could find out if FTX’s system really is the next big thing — and the country’s farmers could rest.
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Farmers Fear Sam Bankman-Fried Crypto Exchange Could Cost Them Sleep
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