Lynn Strongin Dodds looks at the implications of LCH’s new clearing services for bitcoin index futures and options contracts traded on GFO-X, a digital asset derivative trading venue.
Paris-based LCH, which is part of the London Stock Exchange Group, was given the regulatory green light to provide clearing services for bitcoin index futures and options contracts traded on GFO-X, a digital asset derivative trading venue.
The deal
The deal, which has been in the works for a year, is seen as a significant milestone towards integrating digital assets into regulated financial markets. It needed clearance from the French national competent authorities – ACPR, Banque de France, and AMF – as well as the European supervisory authorities – EMIR College and the European Securities Markets Authority (ESMA).
The contracts will be cleared through LCH DigitalAssetClear, which will operate a fully segregated clearing service including a ringfenced default fund and a dedicated set of clearing rules. It will be based on the GFO-X/Coin Metrics Single Asset Real-Time Bitcoin Index (GFOXBR), which is an EU Benchmark Regulation – compliant reference rate of the US dollar price of bitcoin. This enables firms to trade futures and options on the bitcoin reference index directly.
LCH DigitalAssetClear, was developed with GFO-X and first mooted at the start of 2022. It started with an assessment as to whether LCH could launch a crypto derivatives clearing service that would be attractive for market participants while complying with regulations and the clearer’s risk management standards.
The firm tested the waters with a consultative working group including a range of market participants who were concerned about the mixing of assets. The discussion shaped the offering’s three key features– a fund separation to protect users in case of defaults, a customised risk management system, and clear rules specifically for this service. In addition, there is no co-mingling from a margin perspective between DigitalAssetClear and LCH’s other clearing services, but it houses a dedicated testing framework and code management.
Competition intensifying
Competition has intensified in this space with traditional exchanges increasingly producing derivatives products referencing digital assets. Derivatives contracts are primarily used by institutions that would like exposure to digital assets but are unable to trade on the spot market due to regulatory constraints.
Europe
Eurex, Europe’s largest exchange, was the region’s first to offer bitcoin index futures, and more recently expanded its repertoire with options on FTSE Bitcoin Index Futures.
They appear as options on futures in EUR and USD, with the respective bitcoin index future as underlying, equivalent to 1 bitcoin. Both options and futures expire at the same time – (17:00 CET – on the last Friday of the month).
The FTSE Bitcoin Index is the reference rate for the final settlement for the underlying futures contracts. It is determined as the volume time weighted average of the FTSE DAR Digital Asset Price over the 15-minute period before the fixing time. Liquidity is supported by orderbook and over-the-counter liquidity providers.
Eurex also made the news in 2021 with its bitcoin exchange traded note (ETN) which was based on the BTCetc Bitcoin Exchange Traded Crypto. It is listed on the Frankfurt Stock Exchange and is one of the world’s most heavily traded crypto exchange traded product (ETP).
USA
Meanwhile, last year CME Group debuted bitcoin and ether futures and options as well as micro bitcoin futures in response to demand for smaller-sized contracts. One Micro Bitcoin future is set to one-tenth of a bitcoin, which is 50 times smaller than a full-sized contract. One Micro Ether future is also one-tenth of an ether, which is 500 times smaller than its full-sized counterpart.
Rival CBOE has also been busy forging its own path starting with the acquisition of ErisX, a US based digital asset spot market and clearinghouse in 2021.
Renamed Cboe Digital, it kicked off 2024 by introducing new margined bitcoin and ether futures, making it the first US regulated crypto native combined exchange and clearinghouse for spot and leveraged derivatives trading on a single platform. The new instruments join existing offering of bitcoin, bitcoin cash, ether, Litecoin and USDC trading on its spot crypto market.
US regulatory change
This year also saw the US Securities and Exchange Commission approve spot bitcoin ETFs. The watchdog, who has been wary of crypto currencies, was forced to approve them last month after Grayscale Investments won a legal battle. A federal appeals court ruled that the regulator had not sufficiently detailed its reasoning for rejecting an application from crypto asset manager Grayscale Investments to list an ETF that tracks the price of bitcoin, in a landmark decision.
The decision encouraged 12 asset managers, including Grayscale, ProShares, VanEck, Invesco, Fidelity and Ark Investments to file applications to launch 25 next-generation cryptocurrency ETFs. However, the SEC remains cautious with cryptocurrencies and complex exchange-traded products.
In fact, in a statement, chair Gary Gensler said that “while we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”
