The Commodity Futures Trading Commission’s Global Markets Advisory Committee advanced a recommendation to expand the use of non-cash collateral through the use of distributed ledger technology (DLT). It provides a legal and regulatory framework for how market participants can apply their existing policies, procedures, practices, and processes to support use of DLT for non-cash collateral in a manner consistent with margin requirements.
“All over the world, there have been successful and proven commercial use cases for tokenization of assets, such as digital government bond issuances in Europe and Asia, over $1.5 trillion notional volume in institutional repo and payments transactions on enterprise blockchain platforms, and more efficient collateral and treasury management. Now, we can finally begin to make progress on US regulatory clarity for digital assets with today’s GMAC recommendation on tokenized non-cash collateral,” said CFTC commissioner Caroline Pham, in a statement.
“This marks a significant first step toward realizing these opportunities for our derivatives markets — with exactly the same guardrails and protections in place. Embracing new technology does not mean compromising on market integrity.”
The CFTC has consistently permitted the use of non-cash assets as collateral to satisfy regulatory margin requirements for both cleared and non-cleared derivatives, subject to specified conditions and limitations designed to mitigate credit, market, and liquidity risks. Various operational challenges, however, have impeded use of non-cash collateral, which results in adverse consequences for market efficiency. By improving the operational infrastructure for assets already eligible to serve as regulatory margin, blockchain or other distributed ledger technology can help reduce or eliminate some of those challenges without requiring any changes to collateral eligibility rules.