It was a busy morning at the intersection of derivatives and virtual currencies. Here is an overview of what happened and some thoughts about what it means for the world of virtual currencies.
- CME and CFE Self-Certify Futures Contracts – The Chicago Mercantile Exchange Inc. (“CME”) and the CBOE Futures Exchange (“CFE”) self-certified new contracts for bitcoin futures products. The CME will clear its own futures contract, while the CFE will clear its contract at the Options Clearing Corporation. According to a CME press release, the contracts will begin to trade on December 18th. Additional information about the CME’s product is available here. To our knowledge, the CFE has not yet announced a start date for the trading of its product.
- CX Self-Certifies Fully-Funded Binary Option – Cantor Exchange (“CX”) self-certified a new fully funded, binary option contract on bitcoin, the salient features of which are summarized here. As with any binary option, this contract is a type of swap for U.S. regulatory purposes. CX provided the following summary of its product, ” [the contract] will be unleveraged and will offer the ability to trade over a range of bitcoin prices, and will trade for dates that are approximately one-month, two-months and three-months ahead. The contracts will be cash settled at 12 noon New York time on the last Friday of each calendar month based on a cash settlement price determined by Cantor Exchange.” Detailed information about the CX bitcoin swap is available here. CX will clear this product through Cantor Clearinghouse. To our knowledge, CX has not yet announced a start date for the trading of its product.
- CFTC Issues Statement on These Self-Certifications – The CFTC issued a statement on these product developments, along with a background sheet that describes the regulatory self-certification process. That information is available here.
- NFA Issues Investor Alert on Virtual Currency Futures Contracts – The National Futures Association (the “NFA”), the self-regulatory organization for the derivatives industry, issued an Investor Alert entitled, Futures on Virtual Currencies Including Bitcoin which is available here. In summary, the alert outlines the risks of trading futures contracts on virtual currencies.
What does all of this mean to “crypto-watchers” and derivatives market participants, including institutional and retail investors?
The world of virtual currencies is about to simultaneously become a lot more institutional and a lot more retail. Exchange-traded products are available for investment by institutional investors, like hedge funds and mutual funds, as well as retail investors. The former will have to give consideration to the application of existing regulatory constructs (like custody and status as a commodity pool operator or commodity trading advisor), if they intend to engage in the trading of these products; while the latter will need to learn more about these products so that they are not surprised by losses or the effect of leverage, margin calls, and related considerations. In addition, both types of investors will need to consider the effect of the applicable position limit and accountability level reporting at the levels of the exchange.
And, it also means that the world of virtual currencies will be subject to a whole new level of increased regulatory oversight, since more attention will be given to the asset class by the CFTC, the NFA, and the exchanges that offer these products.
Good day. Good amount of activity for the first of December! DR2