Arnab Sen, CEO and co-founder of GFO-X, the UK-based digital asset derivatives trading venue, said large institutions need derivatives, and especially options, in a regulated venue to have confidence when it comes to trading. to enter the cryptocurrency market.
Sen spoke on a panel at the FIA โโIDX conference on June 18 in London. In April last year, GFO-X announced a strategic partnership with LCH SA, the European clearinghouse of the London Stock Exchange Group, to launch a segregated central counterparty clearing service, subject to regulatory approval.
"We are looking for a fully regulated, institutional-grade venue for cryptocurrencies that is connected to traditional market infrastructure," he added. "You can't act fast and break things in a regulated financial market."
He went on to say that an asset class is not mature until it has three legs: spot, futures and options. Options represent 65% of derivatives volumes according to the FIA, while Sen highlighted that ether trades less than $3 billion in options. Furthermore, Sen argued that the biggest problem in the cryptocurrency space is currently credit, so options are needed to smooth out volatility.
Sen said: โWhy wouldn't you want to mine that volatility? The curve is very short in crypto, up to six months, but taking it to three years allows structured products for private banks and large institutions.โ
However, Sen went on to say that pursuing options involves overcoming multiple challenges, including counterparty risk, technological hurdle that is higher than that of futures, and a 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-Clรฉdiรจre, CEO of LCH SA, said in a statement at the time that LCH SA is excited to work with GFO-X, together with the industry, 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, said on the IDX panel: โWe are a highly regulated central counterparty and can build confidence in the underlying asset class for institutional investors through risk mitigation. โWe can eliminate some of the underlying counterparty risk, contagion and operational risks that persist today in the bilateral world.โ
Robinson went on to say that LCH wanted to take the opportunity to enter a new asset class, especially as cryptocurrencies are moving from a retail market to an institutional market, and created a working group to test demand.
"We have robust risk and margin management processes that are tested and trusted by regulators and the user community," Robinson added.
He used the analogy of over-the-counter derivatives that made a complete shift toward central clearing after the 2008 financial crisis. According to Robinson, bringing over-the-counter markets to a cleared, regulated and trusted world created more trust, and the markets have grown.
"We are looking to create an infrastructure that resembles how traditional derivatives markets operate today in terms of trading and clearing," he added.
The collateral will be specifically segregated and ring-fenced so that LCH DigitalAssetClear prevents contagion. LCH DigitalAssetClear is backed by a segregated default fund, a customized risk management model and a specific set of compensation rules.
