Markets
Options Contracts Necessary in Crypto Markets
Arnab Sen, chief executive and co-founder of GFO-X, the UK’s digital asset derivatives trading platform, said large institutions need derivatives, and particularly options, on one platform. -regulated form to be able to confidently enter the crypto market.
Sen spoke on a panel at the FIA IDX conference on June 18 in London. In April last year, GFO-X announced a strategic partnership with LCH SA, the European clearing house of the London Stock Exchange Group, to launch a separate central counterparty clearing service, subject to regulatory approval.
Arnab Sen, GFO-X
“We are looking for a fully regulated institutional grade venue for crypto, connected to traditional market infrastructure,” he added. “We cannot act quickly and break things on a regulated financial market. »
He added that an asset class is not mature until it has three legs: spot, futures and options. Options account for 65% of derivatives volumes according to the FIA, while Sen pointed out that ether trades less than $3 billion worth of options. Furthermore, Sen argued that the biggest problem in crypto currently is credit, so options are needed to mitigate volatility.
Sen said: “Why wouldn’t you want to extract that volatility? The curve is very short in crypto, up to six months, but extending it to three years allows structured products for private banks and large institutions.
However, Sen added that options resolution involves overcoming multiple challenges, including counterparty risk, technological hurdle which is higher than for futures and stable architecture.
In April this year, LCH SA received regulatory approval to clear Bitcoin index derivatives through its new LCH DigitalAssetClear service for cash-settled Bitcoin index futures and options contracts traded on GFO-X. LCH SA plans to launch the clearing service this year. Corentine Poilvet-Clédière, chief executive of LCH SA, said in a statement at the time that LCH SA was delighted to work with GFO-X, in collaboration with the industry, to provide a regulated market for this asset class .
Marcus Robinson, the new head of LCH CDSClear and head of LCH DigitalAssetClear at LSEG Post Trade, said during the IDX panel: “We are a highly regulated central counterparty and can build confidence in the underlying asset class for institutional investors through risk mitigation. We can eliminate some of the underlying counterparty risk, contagion risks and operational risks that persist in the bilateral world today.
Robinson added that LCH wanted to take the opportunity to enter a new asset class, especially as crypto moves from a retail to an institutional market and created a task force to test demand .
Marcus Robinson, CHL
“We have robust risk and margin management processes that are proven and trusted by regulators and the user community,” added Robinson.
He used the analogy of the massive shift from over-the-counter derivatives to central clearing after the 2008 financial crisis. According to Robinson, the integration of over-the-counter markets into a cleared, regulated and trusted world created more confidence and markets grew.
“We are looking to create an infrastructure that resembles how traditional derivatives markets operate today in terms of trading and clearing,” he added.
Collateral will be separated and ring-fenced specifically for LCH DigitalAssetClear to avoid contagion. LCH DigitalAssetClear leverages a separate default fund, a tailored risk management model and a dedicated set of clearing rules.
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