Arnab Sen, CEO and co-founder of UK-based digital asset derivatives trading venue GFO-X, said that for large institutional investors to confidently enter the cryptocurrency market, they need derivatives, particularly options, to be traded on a regulated venue.
Sen was speaking on a panel at the FIA IDX conference in London on June 18. Last April, GFO-X announced a strategic partnership with LCH SA, the European clearing house of the London Stock Exchange Group, to launch a segregated central clearing settlement service, subject to regulatory approval.
Arnab Sen, GFO-X
“We want to be a fully regulated, institutional-grade crypto venue that's embedded in traditional market infrastructure,” he added. “In regulated financial markets, you can't have sudden movements that break things.”
He further stated that the asset class will not mature until it has the three pillars of spot, futures and options. According to the FIA, 65% of derivatives trading volume is options, but Sen emphasized that Bitcoin and Ethereum options trading volume is less than $3 billion. Furthermore, Sen argued that the biggest problem with cryptocurrencies is trust, and options are needed to smooth out volatility.
“Why wouldn't you want to extract that volatility? Crypto curves are very short, six months, but by extending the curve to three years, it allows for structured products for private banks and large institutions,” Sen said.
However, Sen continued that solving the issues in options trading requires overcoming several challenges, including counterparty risk, higher technical hurdles than futures trading, and a stable architecture.
In April of this year, LCH SA received regulatory approval to clear bitcoin index derivatives through its new LCH Digital Asset Clear service for cash-settled bitcoin index futures and options contracts traded on GFO-X. LCH SA plans to launch its settlement services later this year. Corentine Poilvet-Clédière, CEO of LCH SA, said in a statement that LCH SA is excited to work with the industry and GFO-X to provide a regulated market for this asset class.
Marcus Robinson, new head of LCH CDSClear and head of LCH DigitalAssetClear at LSEG Post-Trade, told the IDX panel: “We are a highly regulated central clearing house that can increase institutional confidence in the underlying asset class through risk mitigation. We can remove some of the underlying counterparty risk, contagion and operational risk that persists in today's bilateral trading world.”
Robinson continued, saying that LCH wants to seize the opportunity to enter a new asset class, especially as cryptocurrency transitions from a retail-driven to an institutional market, and has established a working group to test demand.
Marcus Robinson, LCH
“We have robust, tried and tested risk management and margin processes that are trusted by regulators and our user community,” Robinson added.
Robinson used the analogy of the full transition of over-the-counter derivatives trading to central clearing after the 2008 financial crisis. Bringing the OTC market into a cleared, regulated and trusted world increased trust and allowed the market to grow, Robinson said.
“We are looking to create an infrastructure that resembles how traditional derivatives markets operate today in terms of trading and settlement,” he added.
Collateral is segregated and quarantined exclusively for LCH DigitalAssetClear to prevent the spread of infection. LCH DigitalAssetClear is underpinned by a segregated default fund, a customized risk management model and a dedicated set of clearing rules.
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