Arnab Sen, chief executive and co-founder at GFO-X, the UK-based digital asset derivatives trading venue, said large institutions need derivatives, and especially options, on a regulated venue to be confident about entering the crypto market.
Sen spoke on a panel at the FIA IDX conference on 18 June in London. In April last year GFO-X announced 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.
“We are solving for a fully regulated institutional grade venue for crypto which is plugged into traditional market infrastructure,” he added. “You cannot move fast and break things in a regulated financial market.”
He continued 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 ether trades less than $3bn of options. In addition, Sen argued that the biggest issue in crypto is currently credit, so options are needed to smooth volatility.
Sen 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.”
However, Sen continued that solving for options involves overcoming multiple challenges including counterparty risk, the technology 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 LCH SA is excited to be working with GFO-X, together with the industry, to provide a regulated marketplace for this asset class.
Marcus Robinson, the new head of LCH CDSClear and head of LCH DigitalAssetClear in LSEG Post Trade, said on the IDX panel: “We are a highly regulated central counterparty and can bring build confidence in the underlying asset class for institutional investors through risk mitigation. We can take away some of that underlying counterparty risk, contagion and operational risks that persist in the bilateral world today.”
Robinson continued that LCH wanted to take the opportunity to enter a new asset class, especially as crypto is moving from a retail-driven market into an institutional market and created a working group to test demand.
“We have robust risk management and margin processes that are tried and tested, and trusted by the regulators and the user community,” added Robinson.
He used the analogy of over-the-counter derivatives making a wholesale shift to central clearing after the financial crisis in 2008. Bringing OTC markets into a cleared, regulated and trusted world created more confidence according to Robinson, and markets have grown.
“We are looking to create an infrastructure that looks similar to how traditional derivatives markets operate today in terms of trading and clearing,” he added.
Collateral will be segregated and ring fenced specifically for LCH DigitalAssetClear to prevent contagion. LCH DigitalAssetClear is underpinned by a segregated default fund, tailored risk management model and dedicated set of clearing rules.
