Cryptocurrency Derivatives: CBOE Responds To FIA President’s Open Letter

So much has happened in just the last 10 days.

To catch you up to speed, last week, Nasdaq and Cantor Fitzgerald announced their intention to offer bitcoin derivative products. Then, on December 1, 2017, the CFTC released a statement about its due diligence and market oversight after CBOE, CME, and Cantor self-certified new contracts for bitcoin futures products.

It would appear that CFTC chairman J. Christopher Giancarlo’s statements did not allay fears, as Futures Industry Association president Walter Lukken, penned an open letter to express concerns regarding cryptocurrency derivatives. Lukken was acting chairman of the Commodity Futures Trading Commission during the sub-prime mortgage crisis, and he served as a CFTC commissioner from 2002 until 2009.

Lukken noted how quickly “these novel products have come to market,” focusing on the astonishingly expeditious, one-day self-certification processes. While this approach might be “suited for standardized products” he wrote, “this process does not distinguish for a product’s risk profile or unique nature” – as is the case with cryptocurrency derivatives.

“We believe that this expedited self-certification process for these novel products does not align with the potential risks that underlie their trading and should be reviewed.” The one-day self-certification process “did not allow for proper public transparency and input,” Lukken asserted.

CBOE responded to the FIA letter with a relatively standard defense of its product and coordination with regulators:

“We worked closely with the CFTC for several months leading up to our product certification to launch trading in Cboe bitcoin (XBT) futures [1]. This process included rigorous vetting and enhancements to the design, settlement, margining and surveillance process for XBT futures, both with the regulator and our clearing house, the OCC. When trading commences on December 10, we committed to continue to work closely with the CFTC to monitor trading and foster the growth of a transparent, liquid and fair bitcoin futures market.
[1] The product certification does not constitute CFTC endorsement of the use or value of virtual currency products or derivatives.”

What remains to be seen is exactly how bitcoin futures impact the underlying market. This morning, ETHNews spoke with CBOE’s Michael Mollet and Suzanne Cosgrove.

The pair declined to provide a guess for the price at which bitcoin futures will debut – understandable given the asset’s recent volatility. Just today, bitcoin has fluctuated madly between $15,000 and $21,000. It is also difficult to gauge just how many people (or institutions) will begin trading bitcoin futures, or what sort of liquidity the market will enjoy.

The absence of regulation in the cryptocurrency markets means that trading of cryptocurrency futures could create unintended – and unexpected – consequences. So, the big question is will someone short the whole thing? From DDoS attacks to instigating flash crashes and from malware to theft, there are many, many factors to consider.

Even if regulators have shored up settlement mechanisms and instituted stricter margin requirements, that’s a financial consideration that will impact the futures products themselves, not the price of bitcoin trading on exchanges. The variables go both ways.

Today, in MarketVoice (FIA’s magazine of the global futures, options, and cleared swap markets), Editor-in-Chief Will Acworth wrote, “The [cryptocurrency] market is not regulated and suffers from operational malfunctions, dodgy trading practices and even outright thefts.”

He continued:

“There are numerous legal and technical challenges that make it difficult for institutional investors to hold cryptocurrency assets in custody for their customers. Still another issue is the market's unreliable infrastructure. Specialists in cryptocurrency trading report that some trading platforms can take several minutes or even hours to confirm a trade, a lifetime in a highly volatile market.”

Perhaps Lukken put it best when he wrote, “While we greatly appreciate the CFTC’s efforts to receive additional assurances from these exchanges, we remain apprehensive with the lack of transparency and regulation of the underlying reference products on which these futures contracts are based and whether exchanges have the proper oversight to ensure the reference products are not susceptible to manipulation, fraud, and operational risk.”