KEY FACT: The Commodity Futures Trading Commission’s (CFTC) Global Markets Advisory Committee (GMAC) has endorsed a recommendation to expand the use of non-cash collateral through distributed ledger technology (DLT). This decision aims to modernize U.S. derivatives markets by leveraging blockchain for enhanced market efficiency and competitiveness, in line with global trends in asset tokenization. The recommendation, presented by the GMAC’s Digital Asset Markets Subcommittee, is the 14th record-setting recommendation advanced to the CFTC this year. While non-cash collateral has long been permissible for regulatory margin requirements, operational limitations have restricted its practical use, which DLT integration seeks to resolve.

Source: CFTC

CFTC Committee Endorses Tokenization of Non-Cash Collateral

The Commodity Futures Trading Commission's (CFTC) Global Markets Advisory Committee (GMAC), under the sponsorship of Commissioner Caroline D. Pham, took a significant step toward modernizing the derivatives market by endorsing a recommendation to broaden the use of non-cash collateral through distributed ledger technology (DLT). This initiative aims to enhance market efficiency and competitiveness by leveraging blockchain technology for collateral management. The report was communicated through Release Number 9009-24 on November 21, 2024.

The Commodity Futures Trading Commission’s Global Markets Advisory Committee, sponsored by Commissioner Caroline D. Pham, today advanced a recommendation to expand the use of non-cash collateral through the use of distributed ledger technology. The GMAC’s Digital Asset Markets Subcommittee also presented on the progress of its Utility Tokens workstream.Source

Commissioner Pham highlighted the global momentum behind asset tokenization at commercial scales, pointing to successful implementations such as digital government bond issuances in Europe and Asia, and over $1.5 trillion in institutional repurchase agreements and payment transactions conducted on enterprise blockchain platforms.

She commended the GMAC and its Digital Asset Markets Subcommittee for their leadership in promoting the competitiveness of U.S. markets and emphasized that embracing new technologies like DLT does not necessitate compromising market integrity.

"Now, we can finally begin to make progress on U.S. regulatory clarity for digital assets with today’s GMAC recommendation on tokenized non-cash collateral,"... I’m also excited by the progress of the Utility Tokens workstream and their extensive efforts on a regulatory solution for these key assets which will help to unleash rapid innovation and growth in the digital economy. I applaud the leadership of the GMAC and the Digital Asset Markets Subcommittee and workstreams for promoting the competitiveness of our markets and the United States.”

The GMAC's Digital Asset Markets Subcommittee presented a recommendation to expand the use of non-cash collateral through DLT, which was approved without objection. This is the 14th recommendation advanced to the CFTC by the GMAC in the past year, setting a record for the most recommendations by any advisory committee within such a timeframe.

The CFTC has historically permitted the use of non-cash assets as collateral to meet regulatory margin requirements for both cleared and non-cleared derivatives, subject to conditions designed to mitigate credit, market, and liquidity risks. However, operational challenges have limited the practical use of non-cash collateral, affecting market efficiency. The integration of blockchain technology is expected to address these challenges by improving the operational infrastructure for assets already eligible as regulatory margins.

In addition to the recommendation on tokenized non-cash collateral, the GMAC's Digital Asset Markets Subcommittee provided an update on the progress of its Utility Tokens workstream. This workstream is focused on developing a regulatory framework for utility tokens, which are digital assets intended to provide access to a specific product or service within a blockchain ecosystem. The advancement of this framework is expected to enhance innovation and growth in the digital economy by providing clarity and guidance for market participants.

The CFTC is poised to maintain the integrity of the derivatives market while promoting its competitive edge on a global scale through blockchain integration in its operations. These efforts are believed to position the U.S. derivatives market at the forefront of innovation and ensure its adaptability in the evolving financial sector.

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