Alameda Research has been allowed to exceed normal borrowing limits on the FTX exchange since its inception, Sam Bankman-Fried says, in a concession that illustrates how the former billionaire’s trade shop was given preferential treatment compared to customers years before the 2022 crypto crisis.
In an interview with the Financial Times, the 30-year-old described the outsized role Alameda played in launching the exchange in 2019 and how he gained access to exceptionally high levels of borrowing from FTX early on. the beginning.
Bankman-Fried said that “when FTX first launched,” Alameda “had pretty significant limits” on borrowing from the exchange, but he “definitely” wished he had held the trading firm to the same standards as other customers.
When asked if Alameda continued to have higher limits than other customers, he replied, “I think that may be true.” He didn’t say how much higher Alameda’s limits were than those of other customers.
FTX and Alameda presented themselves publicly as separate entities to avoid the perception of conflicts of interest between the exchange, which handled billions of dollars in customer trades a month before its collapse, and the trading firm that owned Bankman -Fried.
Bankman-Fried’s comments highlighted the longstanding special treatment for Alameda. Close corporate ties and Alameda’s large amount of borrowing from FTX played a key role in the dramatic collapse of the exchange, once one of the biggest crypto venues and valued at $32 billion. by investors such as Sequoia and BlackRock.
Previously one of the digital assets industry’s most respected figures, Bankman-Fried has apologized for mistakes that left 1 million creditors facing steep losses on funds they entrusted to FTX, but denied intentionally misusing clients’ assets.
Bankman-Fried said the origins of the large borrowing limits for Alameda stem from the trading shop’s early role as a primary liquidity provider on FTX before attracting other financial groups.
FTX, like other major offshore trading platforms, handled large volumes of derivatives which allowed traders to increase their bets using borrowed funds – but professional firms are usually needed to keep the market running smoothly .
“If you go back to 2019 when FTX first launched, at that time Alameda was 45% volume or something on the platform,” Bankman-Fried said. “It was basically a situation where if the Alameda account ran out of capacity to take new positions, it would cause risk issues for the platform because we didn’t have enough liquidity providers. I think that he had some pretty significant limitations because of that.
This year, he said, Alameda accounted for about 2% of trading volume and was no longer the primary liquidity provider on the exchange. Bankman-Fried said he regretted not reviewing the trading company’s treatment to ensure it was subject to the same borrowing limits as other similar companies operating on the exchange.
FTX lent to traders so they could make big crypto bets with just a small initial outlay, known as margin trading. FTX’s heavy exposure to Alameda was a key reason why the trading company’s weak balance sheet caused a financial crisis that engulfed both companies.
Bankman-Fried estimated Alameda’s debts to FTX at around $10 billion by the time the two companies filed for bankruptcy in November.
“From a volume, revenue, liquidity perspective, the exchange was effectively independent of Alameda. Obviously, that didn’t hold true in terms of positions or balances on the site,” Bankman said. -Fried.
John Ray, the insolvency veteran who runs the bankrupt FTX, criticized his former manager for not separating Alameda and FTX. In court filings, he pointed to a “covert exemption by Alameda from certain aspects of FTX.com’s reverse charge protocol.”
The automatic liquidation, or closing, of downgraded positions was a key principle of FTX’s risk management procedures and a central part of its proposals to change parts of US financial regulations. When a typical client’s trade started to sink, FTX’s liquidation mechanism was supposed to start draining margin from the account to protect the site from a single trade resulting in a loss for the exchange.
However, Bankman-Fried said there “may have been a delay in liquidation” for Alameda and possibly other large traders. He said he was “unsure” whether Alameda was subject to the same liquidation protocol as other traders on the exchange, and that the trading firm’s account treatment was “evolving”.
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