Tag: systemic risk

FTX Former CEO Sam Bankman-Fried Grilled in Court Over Exchange's Risk Management Measures

FTX CEO Sam Bankman-Fried (SBF) found himself in the hot seat during a recent court proceeding regarding the exchange’s risk management measures. The hearing, documented by BitMEX Research, shed light on a catastrophic event stemming from a flawed risk engine in 2020, the subsequent code change titled “Allow Negative,” and its implications on FTX’s operations.

In 2020, FTX’s risk engine was beleaguered by an overwhelming growth, falling behind in real-time monitoring due to inadequate computational resources. A minor liquidation event spiraled out of control due to the delay, causing a position worth thousands to escalate to trillions within minutes. The risk engine’s delayed responses led to a ping-pong effect of continuous erroneous liquidations and buybacks. This glitch pushed Alameda’s account underwater, risking a platform-wide socialization of losses. The event rendered FTX inoperative for an hour, underlining a systemic risk to the entire exchange and its platforms.

Post-catastrophe, SBF entrusted Gary and Nishad to rectify the risk engine’s deficiencies. They introduced a feature, retrospectively identified by SBF as “Allow Negative.” However, during the cross-examination, SBF claimed his unawareness of the feature’s specifics, a statement the prosecutor found incredulous given SBF’s dedication and the event’s severity.

The court also delved into FTX’s client acquisition strategy and growth trajectory. Initially, FTX garnered clients through industry connections, evolving from trading a few million dollars daily to $10 to $15 billion per day by 2022. The 2019 blog post, “Our Liquidation Engine,” was cited, highlighting FTX’s proactive stance on minimizing clawback probabilities, learning from predecessors like Okex and Bitmex.

The intertwined operations of Alameda and FTX were dissected, focusing on Alameda’s borrowing from FTX, managed by margin traders’ funds. The hearing also touched on the transition of Alameda’s leadership to Caroline Ellison and Sam Trabucco, following SBF’s stepping down.

SBF’s romantic involvement with Caroline Ellison and personal loans from Alameda were discussed, alongside allegations of SBF instructing political donations by FTX employees. Additionally, the CEO’s intent behind inflating 2021 revenue to surpass $1 billion was scrutinized, painting a complex picture of professional and personal intersections.

The court session unveiled the challenges FTX encountered in managing systemic risks, reflecting on the multifaceted responsibilities of SBF as the CEO. Amid rapid growth, ensuring robust risk management protocols and transparent operations remains pivotal for FTX’s sustainable progression.

EU Authorities Probe Bank-NBFI Ties, Including Crypto

Both the European Banking Authority (EBA) and the European Systemic Risk Board (ESRB) have begun an important inquiry into the complex ties that exist between conventional banks and non-bank financial institutions (NBFIs), which includes the cryptocurrency industry, which is undergoing fast development. A significant worry has been raised over the possible systemic hazards that might arise from these linkages, particularly in high-pressure financial conditions. This action highlights this increasing concern.

Nearly half of the world’s financial assets, which are estimated to be worth $219 trillion, are now held by non-bank financial institutions (NBFIs), which include hedge funds, private equity companies, money market funds, and crypto businesses. New dynamics have been brought into the financial ecosystem as a result of this rapidly expanding industry, which simultaneously offers advantages related to diversification while also bringing new problems. The proliferation of digital currencies in particular has attracted the attention of investors as well as the scrutiny of regulatory authorities. By means of its recently implemented Markets in Crypto Assets (MiCA) law, the European Union is making an effort to bring the crypto framework of its member states into conformity with one another.

The European Banking Authority (EBA), which is in charge of performing stress tests on EU banks every two years, is putting more and more of its attention on the possible contagion effects that may be caused by non-bank financial institutions (NBFIs). The Chair of the European Banking Authority, José Manuel Campa, underlined the need of an understanding of the “whole underlying chain in NBFIs” in order to evaluate the effects that a shock to shadow banking might have on the larger financial system. In accordance with this, the European Banking Authority (EBA) has suggested regulations for cryptocurrency enterprises to guarantee thorough due diligence and transaction monitoring, as well as drafted guidelines that target liquidity and capital requirements for stablecoin issuers.

The European Bank for Economic Cooperation (EBA) and the European Securities and Exchange Board (ESRB) are working together to analyze the intricate web of relationships that exist between banks and non-bank financial institutions (NBFIs). The effort was conceived out of worries over the potential for stress within the non-bank financial institution (NBFI) sector, which includes crypto businesses, hedge funds, and private capital groups, to spread to the banking sector, which may possibly lead to greater systemic difficulties. Campa brought attention to the fact that while the direct connections between banks and non-banks have been evaluated, the mechanisms of indirect transmission continue to be an equally important topic of research. The probe is a component of a larger worldwide effort to regulate the shadow banking industry and reduce the risks to the stability of the financial system.

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