A month back, Financial Times had reported that Goldman Sachs’ chief executive David Solomon and crypto exchange FTX’s founder Sam Bankman-Fried met in the Caribbean to discuss the bank advising the crypto firm on its dealings with U.S. regulators.
Per a recent Barron’s report, the investment bank and FinServ company are still in talks with the crypto exchange to integrate some aspects of their derivatives businesses.
On its part, FTX is one of the world’s largest crypto exchanges and currently offers a platform to trade to U.S. investors via an arm called FTX.US.
Quite recently, the company had applied for a license modification from the Commodity Futures Trading Commission to act as both an exchange and middleman between counterparties in leveraged derivatives trades. Theoretically, brokerages like Goldman act as futures commission merchants and currently handle such a role.
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. He added,
“We have multiple FCMs already committed to integrating technologically with the exchange… 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. Per Barrons,
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.
So now, even if Goldman or other Wall Street brokerages end up integrating some of their trading services with FTX, it is still not clear if regulators would be on the same page and wave a green flag.
Clash of opinions
Congress has held hearings on the FTX’s proposal to act as an FCM but had said that the same warrants scrutiny. In fact, FTX has already faced a pushback from the Futures Industry Association, which represents brokerages and other firms involved in derivatives.
The association labeled the proposal to be “potentially risky,” and wrote a letter to the CFTC, saying it could “exacerbate financial instability in a time of heightened market volatility.”
FTX, on its part, has time and again asserted that its integrated model would improve market stability. In fact, per the exchange, its procedures have been battle-tested via trades on its offshore exchange, FTX.com during both—certain and uncertain—times.
In fact, Harrison believes that proposal would 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.”
The integrated model would end up freeing up capital for brokerages now acting as FCMs, per the exec, and could lead to more revenues. He said,
“We’re going to give them a greater chance of having a profitable futures’ business.”