First published on Risk.net on 13 July 2023.
Eurex’s new FTSE Bitcoin Index Futures contracts can help investors remove regulatory uncertainty from their crypto investments.
As jurisdictions worldwide continue to grapple with how best to provide regulatory clarity for trading digital assets, traditional exchanges are stepping up to provide investors with ways to gain bitcoin exposure, without being left vulnerable.
Events of the past year – which resulted in losses across crypto and traditional finance – highlighted that where you trade is just as important as what you trade. One year ago, it wouldn’t have been unusual for crypto investors to trade on an unregulated platform – based in an offshore jurisdiction – offering integrated market‑making, clearing, custody and even borrowing/lending services. Now, however, investors have become more cautious.
Against this backdrop, Eurex, Europe’s leading derivatives exchange, partnered with leading global index provider FTSE Russell and institutional-grade crypto market data provider Digital Asset Research (DAR) to launch futures on the FTSE Bitcoin Index in EUR and USD. The new futures contracts provide investors with a solution to gain cryptocurrency exposure through a safe and trusted framework.
“The high-profile bankruptcies of 2022 prompted market participants to re-evaluate how they’re approaching crypto markets, who they want to interact with and the level of transparency they want over trading operations,” says Rafael Zanatta, crypto and equity index sales, Europe, the Middle East and Africa, at Eurex. “Many firms within the ecosystem were not focused on counterparty risk, as the market operates without the same amount of regulation and risk management controls currently present in traditional finance markets.”
“Having a centrally cleared product in a familiar jurisdiction is an increasingly attractive proposition to the institutions we spoke to, so we created a product to meet that demand,” adds Nicolae Raulet, crypto derivatives product manager at Eurex. “It was for the same reason we opted for a cash‑settled contract with an established benchmark regulation [BMR]-compliant index.”
Seamless access to crypto
As investors well know, the crypto product landscape is diverse and dynamic. Products come and go at a fast pace, which requires a lot of diligence on the part of the investor – legal advice to understand the prospectus where available, alongside technical advice around replication, collateral, risk and insurance, to name a few. However, listed derivatives products, such as Eurex’s FTSE Bitcoin Index Futures, operate under the same umbrella as equity index futures at the exchange, which means investors have clarity and certainty on how these contracts behave under various circumstances.
Our aim in launching FTSE Bitcoin Index Futures at Eurex was to give investors the option to trade through a regulated venue in a trusted jurisdiction with the same risk management systems that operate in asset classes such as equities and fixed income.
The underlying FTSE Bitcoin Index reflects the settlement price of bitcoin as determined by the FTSE DAR Reference Price. Liquidity is supported by order book and over-the-counter (OTC) liquidity providers. The contracts, launched on 17 April, represent a major milestone in the exchange’s ambitions to offer safe and trusted access to cryptocurrencies in a regulated market environment.
The contracts were designed to cater to a wide range of global investors, offering a one‑bitcoin multiplier. Initial margins are around 25%.
The cash‑settled contracts trade 21 hours a day, Monday to Friday and settle at 17:00 CET on the last Friday of the month. AA rated central counterparty Eurex Clearing manages all trades, thereby minimising counterparty risk and adding an additional layer of security.
Eurex’s FTSE Bitcoin Index Futures adhere to Europe’s BMR and have regulatory approval from Germany’s Federal Financial Supervisory Authority. Given the strong regulatory framework under which futures exchanges operate, many investors view listed derivatives as the safest way to add bitcoin to a portfolio.
“Market participants that directly invest into cryptocurrencies have to hold the assets in cold or hot wallets, via custody providers or self‑custody – but holding the assets comes with risks: risk of hacks, risk of losing or forgetting your private key and the risk of counterparty default – basically, the investor holds the entire risk,” says Zanatta.
With an index futures product such as Eurex’s, these risks are eliminated: investors buy exposure to bitcoin – not bitcoin itself – and that exposure is guaranteed through a central clearing mechanism.
“By design, crypto-listed index futures follow the exact same setup as any other index-based futures contract. The investor can take a view on where bitcoin will go, but then leaves the complexities of trading and the underlying hedging with the specialist firms that will make that bridge between the two worlds and offer you the price for such exposure,” explains Raulet.
“Moreover, through Eurex, investors can gain exposure via existing trading accounts without the need for costly additional infrastructure setup.”
“The clearing house backs our index futures contract, and you receive your cash settlement on expiry. You don’t need to worry about who the asset’s custodian is or about anyone lending your collateral, and there is no management fee either,” adds Zanatta. “Institutional investors already know how such contracts look and work, so it’s a simple option for those looking to diversify their portfolios.”
As the first European exchange to offer bitcoin index futures, Eurex understands that bitcoin liquidity is currently concentrated outside of the European time zones. The exchange sees this as an opportunity to develop a European liquidity pool for bitcoin futures. “Although our futures contracts are available worldwide, our customers have lamented they have had difficulty getting significant trades done during European hours. We want to change that,” says Zanatta.
Recently, the Eurex FTSE Bitcoin Index Futures also received approval from the US Commodity Futures Trading Commission. Trading for US‑based investors began on May 29, 2023. US investors can now trade these contracts directly on Eurex and benefit from trading and hedging opportunities.
Eurex has a growing number of liquidity providers streaming prices on-screen, as well as committed participants for block trade liquidity. “What has been interesting about the types of providers we have is that they are traditional exchange members, rather than crypto natives. They’re active in the various asset classes we offer, but also have specialised crypto desks connected to crypto spot markets,” says Zanatta.
“We also have interest from crypto-native firms that understand how several investors prefer to trade with the safeguards and guarantees of a regulated exchange, rather than OTC,” he adds.
“The plan for the next few months is to build average daily volume for both the EUR- and USDdenominated contracts, and to introduce options on the same indexes. These too will comprise all the benefits available with the futures contracts – namely, a way to gain exposure to bitcoin through a safe and trusted framework,” says Raulet.
The index rule book has strict vetting criteria that FTSE Russell and DAR apply to determine the list of participating exchanges. It also has clear rules on eligibility, or loss thereof, from exchanges contributing to the price. “We are in close dialogue with our partners at FTSE on the constantly evolving landscape of crypto spot markets, and trust their strong governance and reputation to apply their rule books, and observe all appropriate restrictions that may impact particular crypto exchanges,” adds Raulet.
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