TeraExchange, LLC (TeraExchange), a swap execution facility (“SEF”) registered with the Commodity Futures Trading Commission (“CFTC”), has announced it will begin trading a non-deliverable forward based upon the U.S. Dollar price of bitcoin (“Bitcoin Swap”). TeraExchange filed a self-certification application for the Bitcoin Swap with the CFTC on September 11, 2014 and issued a press release on September 12, 2014 announcing the launch of the Bitcoin Swap. The press release noted that TeraExchange had been working with the CFTC staff “for over six months” to ensure the Bitcoin Swap meets all of the CFTC’s regulatory requirements.

The basic characteristics of the Bitcoin Swap are as follows:

  • The Bitcoin Swap is designed to reflect the price a party is willing to pay for bitcoins at various points in the future and will allow a party to hedge the volatility of the USD price of bitcoin;
  • Accordingly, at the expiration date of the Bitcoin Swap, the parties to the swap will exchange US Dollars to settle the difference between the forward rate of bitcoin (priced in USD) agreed upon at the time the Bitcoin Swap was entered into and the rate in USD of bitcoin on the settlement date – in this regard, the Bitcoin Swap resembles a non-deliverable currency forward in terms of the product’s architecture; and
  • The reference index for the BitCoin Swap is the “Tera Bitcoin Price Index,” which is calculated using information provided by at least 6 underlying bitcoin exchanges. The Tera Bitcoin Price Index is designed to represent a USD-equivalent price for bitcoin that accurately reflects the underlying cash market in bitcoin. It will be made available to participants on the SEF and will be updated at least every 5 seconds.

In order to trade the Bitcoin Swap a party must meet the following requirements:

  • Qualify as an “eligible contract participant,” as that term is defined under the Commodity Exchange Act and related CFTC rules;
  • Become a participant of the TeraExchange, which will require that the party remain in compliance with the TeraExchange rulebook;
  • Enter into a “Master Confirmation Agreement For USD/Bitcoin Non-Deliverable Forward Transaction” which includes the incorporation of a 2002 ISDA Master Agreement and Schedule and related Credit Support Annex (the “CSA”).

The CSA published by TeraExchange for use with the Bitcoin Swap will require: 1) an Independent Amount of 25% of the notional amount (i.e., initial margin) on each trade; and 2) bi-lateral posting of collateral when the mark-to-market on the portfolio of Bitcoin Swaps between two participating market participants exceeds $10,000. Unless two parties otherwise agree, the only acceptable form of collateral is United States dollars.

Good day. Good development. DR2