CFTC Seeks To Revamp Its Risk Management Program To Keep Pace With Evolving Market

Updated: 03 June 2023

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The Commodity Futures Trading Commission (CFTC) has proposed a comprehensive revamp of its risk management regulations. It emphasizes the need for firms to prepare for the volatility of cryptocurrencies and the associated risks of holding customers’ digital assets. Further, the US regulator seeks to reassess risk frameworks to keep pace with evolving markets.

ICYMI: @CFTCcgr released a statement on advance notice of proposed rulemaking for risk management program regulations. Learn more: https://t.co/kZH4Jirnct

— CFTC (@CFTC) June 2, 2023

In a statement by CFTC commissioner Christy Goldsmith Romero, she noted that emerging technologies such as digital assets, artificial intelligence, and cloud services have introduced vital risks. This has compelled the CFTC to reevaluate its regulatory oversight and risk management requirements.

The main focus areas are the technology and cyber sectors, customer fund segregation, safeguarding counterparty collateral, and climate-rated financial risk.

Further, major institutional collapses and rising risks associated with distributed networks, stablecoins, and digital assets may influence that regulation. Romero further added:

“Digital assets carry risks—something that has become all too clear in the past year

The proposal, aimed at bolstering investor protection and ensuring the financial system’s stability, will now undergo a period of public comment before potential implementation.

CFTC Now Open To Public Comments

In a June 1 statement, Romero announced the CFTC’s invitation to comment on potential risk management program changes. She highlighted the increasing integration of digital assets with banks and brokers and the evolving risks posed by these developments.

Romero also drew attention to the ongoing concerns surrounding custody practices within the industry. She noted that brokers might consider holding customer assets as stablecoins or other digital assets, which could introduce unique and unknown risks.

The CFTC is now open to public comments on the proposal for 60 days.

According to Romero, more than the existing CFTC risk models may be required to manage an evolving financial sector. She said, “We should not assume that our existing segregation rules and risk management framework comprehensively cover the evolving market risks.”

As per CFTC’s commissioner, the uncontemplated risks associated with safeguarding customer property have come to light with the rise of stablecoins.

Romero asserted that ”for example brokers may explore holding customer property in the form of stablecoins or other digital assets that could result in unknown and unique risks.” Further considerations include cyber attacks and a potential necessity to update segregation rules to account for future risks.

The Agency’s Proactive Approach

Commissioner Romero, known for her crypto-friendly stance, has been vocal about the importance of oversight and investor protection. She has consistently advocated for measures to mitigate risks and enhance regulatory safeguards. In April, Romero proposed reducing the anonymity of certain tokens to better manage the risks associated with digital assets.

The CFTC’s proactive approach aligns with recent regulatory efforts to monitor and regulate the crypto industry more closely. Earlier this year, CFTC filed a lawsuit against Binance, the world’s largest crypto exchange, accusing it of multiple trading derivatives violations and failure to comply with AML and know-your-customer regulations.

As the CFTC addresses the risks posed by the ever-evolving digital asset landscape, it is poised to play a vital role in shaping the regulatory framework surrounding cryptocurrencies and emerging technologies. By addressing the risks associated with crypto volatility and custody practices, the CFTC aims to enhance investor protection and ensure the stability and integrity of the financial system.

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