is in talks with crypto exchange FTX to integrate some aspects of their derivatives businesses, according to a person familiar with the matter.
FTX is one of the world’s largest crypto exchanges. It currently offers crypto trading to U.S. investors through an arm called FTX.US, and recently acquired a U.S.-regulated derivatives exchange.
Now, the company is seeking a license modification from the Commodity Futures Trading Commission (CFTC) to act as both an exchange and middleman between counterparties in leveraged derivatives trades—handling the collateral and margin requirements in-house when borrowed money is in play.
That role is currently handled by brokerages such as
(ticker: GS), which act as “futures commission merchants,” or FCMs.
Yet FTX may now be winning over some of the very Wall Street players that it is challenging, in the latest sign of crypto upstarts pushing deeper into traditional finance.
The biggest FCMs are “absolutely” warming to the crypto exchange’s proposals, said Brett Harrison, the president of FTX’s U.S. arm, in an interview with Barron’s. “We have multiple FCMs already committed to integrating technologically with the exchange,” Harrison said. “There are several large ones you can probably name.”
Goldman is one of the FCMs in talks with FTX, according to a person familiar with the matter. Commitments to integrate with FTX could include trading futures directly, introducing clients and acting as an on-ramp to the exchange, or providing capital top-ups for clients, according to another person familiar with the matter.
Even if Goldman or other Wall Street brokerages aim to integrate some of their trading services with FTX, it’s unclear if regulators will sign off.
The CFTC has said that FTX’s proposal to act as an FCM warrants scrutiny. Congress has held hearings on the matter.
FTX’s proposals to integrate derivatives trading in-house threatens to disintermediate brokerages, challenging a corner of the market dominated by firms like Goldman. It has faced pushback from the Futures Industry Association, which represents brokerages and other firms involved involved in derivatives, including Goldman.
The association said on May 12 that FTX’s proposal was “potentially risky,” and wrote a letter to the CFTC, saying it could “exacerbate financial instability in a time of heightened market volatility.”
The current system for derivatives trading was established after the 2008-2009 financial crisis, aiming to avoid the build-up of leverage within large firms.
The FCMs now hold investors’ collateral and manage margin, for instance, making “margin calls” as necessary, often overnight, if more capital is needed to shore up a position. They also post capital to clearing houses, which stand between buyers and sellers, to offset losses in the case of default.
FTX argues that its integrated model would improve market stability. The firm holds customer collateral itself and says it calculates margin requirements every 30 seconds, liquidating positions automatically as necessary, rather than waiting overnight.
FTX says its procedures have been battle-tested across tens of billions of dollars of trades, including periods of extreme market stress, through its offshore exchange, FTX.com.
But derivatives firms have pushed back against FTX’s proposals. Terry Duffy, the chair and CEO of CME Group, the world’s largest financial derivatives exchange, has called FTX’s proposal “glaringly deficient.”
Harrison believes FTX’s proposal will ultimately benefit FCMs. He says brokers have come under increased pressure from regulations requiring them, as intermediaries, to post large amounts of capital, while clearing houses have not had to put as much “skin in the game.”
FTX’s integrated model, Harrison said, would free up capital for brokerages now acting as FCMs, and could lead to more revenues. “We’re going to give them a greater chance of having a profitable futures business,” he said.
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