The U.S. Commodities Futures Trading Commission (CFTC) issued an advisory notice on May 13th2020 to kindly remind all Designated Contract Markets (DCMs), Futures Commission Merchants (FCMs), and Derivatives Clearing Organizations (DCOs) to prepare for the possibility that certain contracts may face extreme market volatility, low liquidity and negative pricing, depending on the contract at hand.
The Advisory comes during the recent unusually high volatility and negative pricing experienced in the May 2020 physically-delivered West Texas Intermediate (WTI) contract and related reference contracts on April 20th 2020. The Division of Market Oversight (DMO), Swap Dealer and Intermediary Oversight (DSIO), and Clearing and Risk (DCR) have collectively referred to as the (Divisions), formed this advisory to remind market participants of their obligations and requirements to take appropriate measures during market volatility.
The Advisory notes: “In light of these considerations, the Divisions remind DCMs, FCMs, and DCOs of their obligations to assess changing market conditions and take appropriate measures in response as contracts approach expiration. Given current market conditions, DCMs, FCMs and DCOs are encouraged to regularly assess whether their risk controls and related mechanisms are reasonably designed, fit for purpose, and appropriately implemented.”
The CFTC further highlights the obligations and necessities for DCMs, FCMs and DCOs appropriately manage their risk through the tools and procedures at their disposal. It is important to clarify that this Advisory has been issued as a prophylactic measure to ensure that market participants adhere to set guidance and rulings to ensure market stability at this time of unprecedented volatility and business disruption.
It is noted on page 2 of the Advisory: “This Advisory is designed to remind registrants and market participants that continued assessment, preparation and planning is warranted in times of market volatility occasioned by COVID-19. This Advisory does not suggest any element of compliance, or lack thereof, by any registrant. Similarly, this Advisory is not intended to suggest that any particular markets or contracts will experience fundamental or technical issues going forward.”
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