The London Stock Exchange Group is planning to start clearing crypto derivatives. This will join the fight amongst the world’s biggest exchanges for a piece of the growing institutional demand to trade in digital assets.
The UK group said that it will use its Paris clearing subsidiary LCH to manage risks for bitcoin options and futures traded on GFOX, an UK-regulated marketplace.
The move was made despite a wave of bankruptcy among crypto companies, a sharp drop in token prices and dozens of enforcement actions taken by US regulators. The price of bitcoin has increased by more than 50% in the last three months, far outpacing the performance of other markets.
This is also a great win for France. It has positioned itself as one of G7’s most open crypto-havens and tried to attract big companies to set up regional headquarters and offices in Paris.
Crypto derivatives are a popular choice for asset managers and traders who cannot trade in coins due to regulatory concerns.
CME Group and CBOE Global Markets are among the biggest competitors of LSE. They have increased their offerings that include crypto assets within more traditional products and service.
Frank Soussan is the head of LCH DigitalAssetClear. This new LCH unit will be clearing digital assets. He said that institutional investors were very interested in trading digital assets.
To make it happen, “there must be a framework that they are comfortable and familiar with. At this stage, traditional market infrastructure is a regulated venue for the market and regulated [clearing houses]”.
Futures and Options products, such as futures or options, allow traders to wager that an asset’s price will rise or drop in a specific timeframe. They can do this while only funding fractions of the trade value.
Market movements can lead to large losses for investors, but they can also be leveraged by investors.
GFO-X was founded in 2020 by a group consisting of ex-hedge fund managers, clearing and settlement executives and former financial analysts. Arnab, the co-founder of GFO-X, stated that he “set up the company specifically to provide institution access to the digital assets space.”
Sen, who founded the hedge fund Harbour Capital in the past, stated that institutions cannot enter into a market until they are assured that their counterparty will not default.
He added, “In traditional markets that risk is managed by a central counterparty clearinghouse.” A clearinghouse sits between the two parties involved in a transaction and helps manage negative fallouts if either party defaults.
LCH is one of the largest clearing houses in the world, but its London branch is where the bulk of the business takes place. LCH’s Paris branch will settle derivatives in cash, and margins for the crypto unit will be kept separately.
Soussan added that “DigitalAssetClear” will have a default fund, and its own rules to prevent a contagion. He said that “at no time will LCH SA be in possession of physical bitcoin assets, which eliminates a significant component of risk.”
Soussan said that to calculate the margin levels for LCH SA, it will use a rate reference created by GFOX and Coin Metrics, which draws prices from seven different exchanges.
LCH Paris aims to clear crypto derivatives by the end of this year, pending regulatory approvals.