Cboe Global Markets has partnered with index provider FTSE Russell to develop new digital asset derivatives, including cash-settled index options, after the exchange group decided to close down Cboe Digital.
In 2022 Cboe completed the acquisition of Eris Digital Holdings (ErisX), which operated a U.S. based digital asset spot market, a regulated futures exchange and a regulated clearinghouse, in order to enter digital asset spot and derivatives markets, including clearing and settlement.
ErisX was operated as a subsidiary, Cboe Digital, with its own regulated designated contract trading venue for physically delivered futures contracts, cleared through a regulated derivatives clearing organization, Cboe Clear Digital. Futures contracts from ErisX could be traded alongside its spot market on a unified platform.
In April this year Cboe decided to close the Cboe Digital spot market and migrate the trading and clearing of Cboe Digital’s cash-settled bitcoin and ether futures into its existing global derivatives and clearing businesses. The digital segment had negative net revenue of -$0.9m in the first quarter of this year, versus -$1.3m in the first quarter of 2023, according to Cboe’s results presentation.
Catherine Clay, global head of derivatives at Cboe Global Markets, told Markets Media that a few things started to come to light during the operation of Cboe Digital.
“We felt we couldn’t comfortably make decisions in the spot crypto market because the regulatory landscape is uncertain,” she added. “We didn’t think we had a right to play or compete in that arena given our conservative stance on not pushing the boundaries within the regulatory regime.”
In addition to closing the digital spot market, Cboe is filing with the Commodity and Futures Trading Commission to migrate the existing cash-settled bitcoin and ether futures contracts to Cboe Futures Exchange.
“The regulatory filings for the migration are underway, and will take several months, but we do see a path to full approval,” Clay said.
She argued that the shift makes sense given Cboe’s expertise in derivatives. The group will not have to develop two different futures exchanges and digital assets can benefit from the advanced functionality that already exists on Cboe Futures Exchange (CFE).
Clients will also not have to connect to two different futures exchanges within Cboe. For example, they will be able to trade VIX and bitcoin futures in one place.
“This allows us to innovate more quickly and efficiently in the digital asset space,” Clay added. “We have some ideas about new products that we want to bring to CFE after the migration, dependent on regulatory approval.”
Innovation
In addition, Cboe Clear Digital is authorised to clear digital assets and Clay said the group will be making regulatory filings to expand clearing into other assets, although clearing Treasury bonds is not on the immediate roadmap.
In June this year Cboe announced it is expanding its collaboration with FTSE Russell on global indexes to digital assets and they are aiming to develop new derivatives. Cboe did a lot of due diligence before choosing an index provider in digital assets, according to Clay.
“We like having a strong index provider in a nascent asset class with an incumbent name as a partner, which makes the offering have more integrity in the eyes of traditional investors,“ she added.
Clay continued that it is important that the FTSE digital asset indices are developed in partnership with Digital Asset Research.
“We have a strong partnership with FTSE Russell,” she said. “They have a new CEO, Fiona Bassett, who is just fantastic in her ability to partner and move things quickly with us, and we like the tempo that we feel with them.”
Kristen Mierzwa, head of digital assets, index investments group at FTSE Russell, said in a blog that the partnership with Digital Asset Research began in 2019.
“We apply the same kind of rigour in digital asset index construction that we would use in the Russell US index series or the FTSE UK index series,” added Mierzwa. “And that means best-in-class operations and governance. Our governance rules meant we were able to screen out FTX as one of our pricing providers, for example.”
New derivatives could potentially begin with cash-settled index options tied to the FTSE Bitcoin Index and the FTSE Ethereum Index, subject to regulatory approvals.
“This is a big regulatory lift, so we don’t expect it to go quickly,” added Clay.
Cboe has chosen to begin with options as institutions are looking to trade digital asset options on a regulated venue in the US, especially since the Securities and Exchange approved spot bitcoin exchange-traded funds in January this year.
“Once spot bitcoin ETFs began trading, the natural next question is where clients can find a hedging tool and maximise their return,” Call added. “That is what is missing for investors and traders who want to allocate to bitcoin through an ETF.”
Cboe BZX equities exchange lists six out of the 11 ETFs listed in the US and has submitted five of the eight filings to list spot ether ETFs, which have been approved by the SEC.
Rob Hocking, head of product innovation at Cboe, said in a statement: “The launch of cash-settled index options will be additive – resulting in a more comprehensive product suite and helping to foster greater liquidity and hedging opportunities in these markets”
CME Group has listed options on both bitcoin and ether futures. Trading volume on CME jumped 115% to a record $931m in May according to a report from CCData.
“CME’s market share among derivatives markets rose by 0.4% to 3.11%, the highest since 2021,” said CCData. “The rise in the trading activity on ether instruments highlights the heightened institutional interest in the asset following the sudden pivot from the SEC on the spot ethereum ETF applications in the U.S.”
Arnab Sen, chief executive and co-founder at GFO-X, the UK-based digital asset derivatives trading venue, also stressed the need for options at the FIA IDX conference in June this year in London. GFO-X has a strategic partnership with LCH SA, London Stock Exchange Group’s European clearing house, to launch a segregated central counterparty clearing service, subject to regulatory approval.
Sen said on a panel that an asset class is not mature until it has three legs – spot, futures and options. Options make 65% of derivatives volumes according to FIA, while Sen highlighted that bitcoin and ether trades less than $3bn of options. In addition, Sen argued that the biggest issue in crypto is currently credit, and options are needed to smooth volatility.
He said: “Why would you not want to extract that volatility? The curve is very short in crypto, out to six months, but taking the curve out to three years allows structured products for private banks and large institutions.”
