On May 30, 2023, the Commodity Futures Trading Commission Division of Clearing and Risk (DCR) issued a staff advisory (CFTC Letter No. 23-07) on the risks associated with the Derivatives Clearing Organization (DCO) clearing of digital assets. DCR will emphasize compliance with the DCO core principles related to system safeguards, conflicts of interest, and physical delivery.

The staff advisory reminds DCO registrants and applicants that when expanding lines of business, changing business models, or offering new or novel products, including with respect to digital assets, DCR will continue to focus on the potentially heightened risks with clearing activities. DCR expects DCOs and applicants to actively identify “new, evolving, or unique risks and implement risk mitigation measures tailored to the risks that these products or clearing structure changes may present.” DCO registrants and applicants should also expect that DCR will focus keenly on the potential risks and DCO core principles related to system safeguards under the Commodity Exchange Act and Part 39 of the CFTC’s regulations, physical settlement procedures, and conflicts of interest.

For DCO applicants and registrants dual-hatted executives, shared systems and resources, or other models that carry risks of conflicts of interest, DCR will emphasize reviews of DCOs for their enforcement of rules that minimize conflicts of interest. Additionally, the implementation of processes for resolving conflicts of interest will be a focus for DCR. Finally, DCR will emphasize reviews of physical settlement arrangements when DCO registrants and applicants clear contracts that might involve the physical delivery of digital assets. This review includes, but is not limited to, whether DCOs have adequately identified and managed risks and obligations associated with digital assets, and whether DCO rules clearly state the obligations of the DCO with respect to physical deliveries with digital assets.

Madalyn Moore, a 2023 summer associate, assisted in the preparation of this post.