CFTC’s Advisory Committee Pushes For Distributed Ledger Technology In Collateral Use

The Commodity Futures Trading Commission’s (CFTC) Global Markets Advisory Committee has recommended expanding the use of non-cash collateral. Commissioner Caroline D. Pham guided the proposal, which focuses on using distributed ledger technology (DLT). This update includes progress shared by the Digital Asset Markets Subcommittee on its Utility Tokens workstream.

Commissioner Pham explained that successful use cases worldwide have demonstrated the potential of asset tokenization. She highlighted examples like digital government bonds in Europe and Asia, large institutional transactions on enterprise blockchain platforms, and improved treasury management.

CFTC Advances Proposal For Tokenized Non-Cash Collateral In Derivatives Market

Pham said the recommendation offers the U.S. a chance to move forward with regulatory clarity for digital assets. She added that using tokenized non-cash collateral could bring opportunities to the derivatives market without affecting safeguards or market protections.

Pham noted the efforts of the GMAC and its subcommittees in promoting competitive markets. She stated that the Utility Tokens workstream is creating regulatory solutions for these assets to drive innovation and economic growth.

The recommendation, approved without objections, is the 14th advanced to the CFTC in the past year, a record for any advisory committee within such a timeframe.

The CFTC allows non-cash assets as collateral for regulatory margin requirements in cleared and non-cleared derivatives. However, operational challenges have limited their broader use, affecting market efficiency.

According to the GMAC’s subcommittee, DLT could streamline processes and address operational barriers. Pham explained that improving infrastructure for eligible collateral would help reduce risks without altering existing rules.

CFTC Proposes DLT Framework for Collateral Use

The recommendation provides a framework for market participants to use DLT while adhering to current margin requirements. It also outlines how existing policies and practices can align with the technology’s use for collateral.

The GMAC was set up to advise the CFTC on issues impacting U.S. market integrity and competitiveness, especially in global business contexts. It also focuses on international standards for futures, swaps, options, and derivatives markets.

Commissioner Pham, who announced the GMAC’s leadership in 2023, oversees the largest advisory committee under the CFTC, comprising members from financial markets, service providers, regulators, and others.

The CFTC currently manages five advisory committees designed to address regulatory and market issues. These committees enable communication between regulators, market participants, and academics. The CFTC clarified that advisory committee opinions do not necessarily represent the agency or the U.S. government.

Harry Jung serves as the GMAC’s federal officer, with Nicholas Elliot as the alternate officer. The new recommendation highlights efforts to strengthen U.S. markets by integrating new technologies like blockchain.