Markets

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Coming to an officially-regulated market near you this month: Bitcoin Futures.

Trading the cryptocurrency will start on Dec. 10 on the Cboe Global Markets Inc. exchange, and by Dec. 18 on the world's biggest futures exchange, CME Group Inc. This means neither restricted access nor the risk of dubious counter-parties will stop hedgers, financial institutions or the downright adventurous from getting in on the most-talked about new instrument.

Yet the two bodies are struggling to persuade members to provide the clearing services crucial to gaining critical mass -- unsurprisingly given the tulip-style mania around Bitcoin and the ever more insane price swings. The chief lobby group for futures brokers, the Futures Industry Association, is pushing back at the speed and ease that the regulator, the Commodity Futures Trading Commission, has waived this through.

It all seems pretty futile. In all likelihood, traders will find a way to access clearing services even if they have to avoid the main providers. While no big bank has enthusiastically endorsed Bitcoin futures, none has ruled out involvement. If they don't do the clearing, smaller non-bank brokers will. Many proprietary risk-trading firms can self-clear anyway.

More Than Sixfold in Six Months
Bitcoin's surge
Source: Bloomberg
Note: Final value is intraday high on Thursday, others are closing prices

With such global interest, there's an inevitability about Bitcoin futures. Are the banks really going to let their customers drift to the competition? If one caves in, the rest will surely follow.

The leaders in futures clearing are Societe Generale SA, member of a huge range of exchanges, and ABN AMRO Group NV, a futures specialist for prop traders. JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. will be crucial too to making Bitcoin futures acceptable, as will big non-bank clearers such as Interactive Brokers, TD Ameritrade Holding Corp. and E*TRADE Financial Corp. Interactive's billionaire chairman is pretty alarming on the potential damage from Bitcoin futures.

Wild Ride
New highs for Bitcoin is pushing volatility higher again
Source: Bloomberg

But "Fear of Missing Out (FOMO)", to use social media parlance, is driving crypto-land. The CME and Cboe have their trading customers to satisfy and they're screaming for this. Build it and they will come. Smaller clearers will rush to fill any gap.

And, in fairness, there's a game attempt to stop this being completely off-the-scale Wild West stuff. It's a cash-settled futures contract in U.S. dollars, with no actual delivery of Bitcoin required. The exchange will impose a minimum initial margin -- the deposit required to trade a specified amount of futures contracts -- of 35 percent. That's seven times more than for trading oil or mini-S&P equity futures. There will be a twice-daily requirement to make sure the 35 percent buffer is intact, given Bitcoin's constant swings. Clearing members can impose a higher limit if they want.

Two-minute trading breaks will kick in if the daily price moves 7 percent away from the previous day's settlement price, then again at 13 percent and a hard limit at 20 percent when all trading will cease unless trading can restart within that band. There are no stated plans to offer options on the futures, until the contract is fully established. That would be too much rocket fuel.

Intraday Breaks
CME Bitcoin futures would have been suspended twice on volatile trading like Thursday
Source: Bloomberg

This is standard stuff that allows trading in a highly-volatile instrument under most circumstances. And it's well within the 35 percent initial margin. Bitcoin did drop nearly 20 percent on Nov. 29 but this wouldn't have triggered the hard price limit. The extra liquidity of additional players may even temper the sharp moves -- as Bank of America points out hopefully. At present bitcoin traders have two options: Long or flat. With futures, you can be short too.

The big banks understandably fear the moral hazard of processing trades on such an absurdly volatile instrument, citing all manner of capital risks to the clearing-house system. Not all these fears stack up, though. There's no obligation to deal with clients unless you want to. But there's the rub: Futures traders will move to clearers that will.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net