Cboe Digital has applied for regulatory approval to launch margin-based futures on crypto assets, which it is hoping to introduce in 2023.
In May 2022 Cboe Global Markets completed its purchase of Eris Digital Holdings (ErisX), an operator of a US-based digital asset spot market, a regulated futures exchange and a regulated clearinghouse, which is the cornerstone of the new Cboe Digital business.
John Palmer, president of Cboe Digital, told Markets Media that since the acquisition closed the two teams have been building and integrating to leverage Cboe’s global brand and assets, which has been a huge effort.
“This includes identifying cross-selling opportunities and educating the other asset class teams so they can help connect clients to Cboe Digital and explain our offerings,” he added.
Cboe Digital’s mission is to bring trust and resiliency to markets and build a best-in-breed exchange and clearing house so people can trade crypto assets and have the same experience as in traditional financial markets, where security is essential, according to Palmer. As a result, the team consists of a mix of people with tremendous experience in traditional finance as well as crypto natives.
Palmer explained that crypto assets on Cboe Digital, whether spot or futures, will operate separately from Cboe’s existing futures exchange due to differences in the asset classes, technology, and needs of the customers.
“Cboe Digital’s platform has been purpose-built with an exchange on bare metal natively supporting FIX and offering co-location, along with a clearing house that was built in the cloud offering real-time data and information to members, both operating 24/7,” he added.
Margin-based crypto futures
Palmer believes Cboe Digital is well positioned for the growth in crypto, despite competition in the sector as institutional interest grows.
“Number one is that the platform has been purpose-built, including the clearing house, so that trading on Cboe Digital gives access to both spot and derivative markets,” said Palmer. “We are really excited to work with the CFTC for approval to trade margin-based futures on crypto assets and plan to launch early next year.”
Once US Commodity Futures Trading Commission approval has been received, clients will be able to trade spot crypto alongside margin derivatives, which Palmer said provides a big efficiency in terms of capital requirements and not having to connect to multiple platforms.
Cboe Digital’s margin application involves futures commission merchants as direct members must post margin through an FCM – which Palmer argued is a big differentiator.
“Our proposal is much more like what you find in other commodities and financial futures markets,” he added.
Crypto venue FTX US has applied to CFTC to offer central clearing of margin products directly to retail customers. In 2021 FTX completed its purchase of LedgerX, which has been rebranded FTX US Derivatives and gained a CFTC-regulated designated contract market, swap execution facility and derivatives clearing organization.
FTX US Derivatives’ proposal would replace the traditional distributed risk clearing model involving FCMs with an automated and centralized process that does not use intermediation, which has been opposed by derivatives exchanges and clearinghouses.
Palmer continued that Cboe Digital’s margin-based crypto futures would start with accepting US dollars as collateral and then look to expand to US Treasuries.
“Customers will be able to trade Bitcoin in both spot and derivatives with the same collateral, which is a really great innovation for the US crypto industry,” added Palmer. “We would love to be able to offer crypto-based collateral and will strive to do so in the future, but first we need to work with the regulators and the industry.”
In addition to regulatory approval, Cboe also needs to work internally to build risk models to make sure its risk committees and FCMs are comfortable with the new futures. Palmer said: “We have to walk before we can run.”
He continued that as Cboe is the home of options, Cboe Digital wants to continue building in derivatives specifically for crypto assets.
“Margin-based futures trading is step one, and we’d love to be able to offer options on those futures too,” added Palmer. “We’ll be looking to do that next year.”
Cboe Digital is also looking at ways to expand the role of its clearing house, which the CFTC has approved as a registered derivatives clearing organization (DCO).
“It’s a DCO, so we don’t always have to stick to just crypto assets.”said Palmer.
In another move to improve efficiency, Cboe Digital announced the launch of a settlement service for over-the-counter crypto in September.
Palmer said the service solves operational inefficiencies that firms experience when trading and settling with multiple counterparties while removing counterparty risks by providing a clearing house. The service can be accessed through a standardized API or Cboe Digital’s trading user interface.
Tokens
Cboe Digital currently supports five tokens which Palmer said cover a significant amount of volume on the market and are available to trade against US dollars, with some pairs offered in USDC stablecoin and Bitcoin.
The business is always actively looking at listing new tokens and takes a pragmatic approach according to Palmer. There is an intensive listing process that includes working with legal counsel for guidance on the commodity or security nature of tokens. In the US commodities are regulated by CFTC and securities are regulated by the SEC.
Once Cboe Digital feels comfortable, it becomes a supply and demand exercise as the business wants to make sure there are liquidity providers to provide a 24/7 book for customers.
“We are intermediary-friendly, so handling direct customers is not our core nature, though it’s supported,” Palmer said. “We want to work with the same intermediaries and broker-dealers that Cboe supports in traditional asset classes, and they have been slowly growing their presence in crypto in the last 12 months.”
Equity partnership
Palmer continued that the initial group of firms that were announced in August as planned equity investors in Cboe Digital is an indication of the types of participants that are showing their conviction in crypto assets and the business’s mission.
“The investment group includes a great cross-section of players across different sectors of the industry,” he said. “We are focused on working with our equity partners to better understand their needs and how we can help them grow their crypto businesses.”
Planned equity investors include retail and institutional intermediaries, liquidity providers and brokers include B2C2, DRW, GSR, Hidden Road, IMC, Interactive Brokers, Jane Street, Jump Crypto, Optiver, Robinhood, tastytrade and Virtu Financial. They will work with planned commercial partner firms including Fidelity Digital AssetsSM, Galaxy Digital, NYDIG and Webull among others.
Since the announcement, Cboe Digital has been getting more inbound enquiries from parties that have strong relationships with Cboe across the globe as they start to focus on crypto and figure out which products and services they want to offer their customers according to Palmer.
Crypto valuations have been falling and Palmer said that, as a result, volumes have dropped over the last six to seven months, but they are slowly starting to come back.
“However, the conviction we are seeing and the interest from broader participants is still really strong and continuing to grow, which shows there is a fantastic opportunity,” he added.
He highlighted the announcement of BNY Mellon launching custody for digital assets, initially holding bitcoin and ethereum, as an example of a seasoned custodian entering the space, and he expects this to continue as regulatory clarity expands.
Tom Rodgers, head of research at ETC Group, said in the European crypto ETP issuer’s Crypto Minutes report, that BNY Mellon is the most trusted institution on the custody front in traditional finance (TradFi), so it represents an enormous leap forward for the industry. There are pools of capital in TradFi that are not comfortable holding their assets with existing crypto-native custodians, but will be comfortable with BNY Mellon as a custodian.
“This is certainly one of, if not the most important institutional developments we have ever witnessed,” added Rodgers. “From a commercial point of view this move will unlock a massive amount of buy-side participation in crypto markets.”
Data
In October Cboe Global Markets announced it has joined the Pyth network, a decentralized financial (DeFI) market data distribution platform to make aggregated market data available on-chain to projects and protocols, as well as to the general public, via the Solana blockchain
Palmer described joining the Pyth network as a fantastic testament to how Cboe is thinking about digital assets in general, with crypto assets being just one part.
“The announcement relates to distributing data from one of Cboe’s US equities exchanges to Pyth, thus creating a new avenue to provide our data to participants that may not access it in other forms,” Palmer added. “We love learning as much as we can about DeFi, so we are really interested to see what people do with the data and what apps they build.”
Cboe plans to begin publishing limited derived equities market data for certain symbols from one of its four US equities exchanges to the Pyth network in the fourth quarter of this year, providing real-time, institutional-grade pricing information to help further grow the network.
Palmer highlighted there are also opportunities to include Cboe Digital’s data within the broader Cboe data network.
“We are working very closely with Catherine Clay, EVP of Data and Access Solutions at Cboe, on expanding those opportunities,” he said.
