FTX cryptocurrency exchange founder and CEO Sam Bankman-Fried faced a roomful of derivatives industry giants and regulators in Washington on Wednesday to argue for his company’s proposal to directly clear transactions. He also neatly illustrated the potential divide between the two sides by tweeting comments while the discussion was underway.
The Commodity Futures Trading Commission (CFTC) hosted the discussion about the possibility of cutting out industry middlemen in an overhaul of derivatives trading first sought by FTX’s U.S. derivatives operation. While the CFTC weighs the company’s application, it invited industry players and academics to debate the topic in the large room at its Washington offices where the agency has often held talks over industry developments. After several hours, Bankman-Fried couldn’t resist dressing down those criticizing his company’s idea.
“There is some irony in some of the statements made by people attempting to protect those who know massively more than they do about the topic and who understand these products extremely well,” Bankman-Fried said late in the day. He further accused critics of the FTX proposal of “condescendingly” talking about protecting users who he maintained know much more than many of the experts the CFTC invited.
“I just had to get that off my chest a little bit,” he said, adding that consumer protection is “extremely important.”
Earlier in the day, Bankman-Fried had said “a lot of things that I think are pretty wrong that have been said, and a lot of things that are pretty helpful, and I really appreciate the latter." The basic idea -- known as “non-intermediated clearing” -- is that his company is seeking the ability to clear his customers’ margin-backed derivatives contracts directly without traditional intermediaries, with Bankman-Fried often touting its benefits for handling market stress as it happens.
During the discussion, the existing industry structure was defended as “quite adaptive” against volatile situations by Sean Downey, executive director for clearing, risk and capital policy at CME Group, the world’s leading derivatives exchange. Downey also criticized any new system that would lean on algorithms over capital cushions, arguing that the former brings its own hazards. “We’ve seen that movie before, and in fact, we saw it very recently,” he said, referring to the recent meltdown of algorithmic stablecoin terraUSD (UST).
Several of the derivatives industry representatives also highlighted their worries about the use of automatic liquidations to respond to real-time market stresses, as envisioned in the FTX.US application to the CFTC.
Gerry Corcoran, CEO of R.J. O’Brien & Associates, called the use of such liquidations a “weapon of mass destruction” that “will create a cycle of flash crashes” without the human interventions common in today’s market that could limit dramatic swings that computers might allow.
For his part, Bankman-Fried responded to dozens of points on Twitter as the discussion stretched over hours. He returned to the debate in the room to defend his views on handling customers’ positions on a live basis, which his company has already been doing in other countries.
"Being able to have that real-time measurement of collateral and position size in real time action allows you to not deleverage a customer position until it actually is necessary, while still being able to do so prior to creating systemic risk," he said. "There are pros and cons, but I think there are a lot of advantages."
UPDATE (May 25, 19:45 UTC): Updated with additional critical comments from Bankman-Fried.
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