FTX CEO Sam Bankman-Fried testified before the House Agricultural Committee on Friday following a proposal to regulate futures markets with automated tools.
Amid skepticism, FTX CEO Sam Bankman-Fried argued in favor of using computers to make margin calls on leveraged positions during a Friday hearing in Washington, D.C.
In his testimony, Bankman-Fried testified that the new automated system would be healthy for markets.
“It would bring competition and innovation,” he said. “It would bring liquidity to the US market and options to US consumers.” The new system would replace brokers making margin calls with a 24/7 IT service.
“Rather than choosing between liquidating a position too early over fear of what could happen over the next two days of exposing one’s self to systemic risk, there can be a real-time, more precise judgment about the health of the position,” he lobbied.
Terry Duffy, a senior CME Group executive, offered an alternative view, lamenting the potential market impacts and saying that current risk frameworks are proven, removing the need for automation.
“Automatic liquidation could exacerbate volatility and create dramatic price moves during times of turbulence-with the potential to build losses on top of losses and destabilize markets for all participants.”
FIA calls for human intervention
Duffy echoes statements made by the Futures Industry Association (FIA) on May 11, 2022, which said it was unsure how reliable algorithms would be in mitigating risk, arguing the need for human interventions.
“During market turbulence, immediately liquidating a large participant during cascading markets can…add to market volatility and may cause further defaults,” the body said, saying they highly value the judgment of finance specialists when making liquidation decisions.
Offering leveraged futures contracts means that investors can take large positions in the market with a minimal investment called margin, borrowing the rest from the exchange.
FTX’s new product would need customers to deposit collateral in their FTX accounts, ensuring enough funds to cover their margins.
Currently, Futures Commission Merchants (FCMs) collect margins and ask for more money overnight to support positions or help clients with their own money. FCMs also contribute to intermediaries between buyers and sellers called clearinghouses to share losses in the event of default.
The new automated system would calculate margin levels every thirty seconds, liquidating positions or selling off the margins in equally divided portions rapidly if margins become too low. There would be other backup liquidity providers in a worst-case scenario.
The FIA called FTX’s plan “innovative” and “transformative,” while warning the CFTC to do its homework before approving the proposal. The CFTC opened FTX’s proposal for public comment with a deadline that expired Wednesday as a precursor to Friday’s House committee hearing.
Big push into futures market for crypto companies
There has been a push by major crypto exchanges such as Coinbase and Crypto.com to establish themselves in the highly-regulated futures market.
In January, Coinbase agreed to buy FairX, a Chicago futures exchange. Last year, FTX US bought LedgerX last year.
FTX US’s play was to buy up a company with a license to operate in the United States. “In the U.S., the crypto exchanges can’t offer leverage on spot crypto without being a regulated futures commission merchant,” said Rosario Ingargiola, head of Bosonic, a crypto settlement company serving institutional investors.
“That’s a big part of why you see bigger crypto exchanges buying [Commodity Futures Trading Commission]-regulated platforms that allow offering derivative products like options and futures to retail clients, as there is a huge demand for leveraged products in the retail client segment.
On Friday, Bankman-Fried announced he purchased a 7.6% stake in Robinhood Markets, which caused shares to surge up to 33 percent.
