The head of LCH-backed crypto derivatives exchange GFO-X has said the fact his venue will trade only crypto futures and options sets it apart from other regulated exchanges that have already launched their cryptocurrency products.
Arnab Sen, the chief executive of GFO-X, the London-based crypto derivatives exchange set to go live in the fourth quarter this year, told Global Investor the segregated clearing service being offered by LCH is also a key differentiator.
Sen said: “When we look at some of the bitcoin index products in the market already, for these exchanges they are just another product that fits into the existing market infrastructure and are co-mingled with the other listed products.
“This means that clearing members can be reluctant to increase their participation because of the increased contagion risk. A key point of difference is that, for us, this is not just another product like it is for the other exchanges,” he added.
GFO-X and the LSE Group-owned LCH said last month that LCH’s Paris-based arm LCH SA will clear GFO-X cash-settled bitcoin futures and options through a new segregated clearing service called LCH DigitalAssetClear, subject to regulatory approval.
Sen said: “We are building a fully segregated service with a separate default fund, which of course represents a higher hurdle to engagement, but firms are generally more comfortable increasing their exposure because of the segregated nature of the business.”
GFO-X and LCH said last month LCH DigitalAssetClear will operate a fully segregated clearing service and default fund.
The segregated clearing service and GFO-X’s approval to operate a multilateral trading facility by the UK’s Financial Conduct Authority combine to form a compelling proposition, according to Sen.
“One of the big issues for the market is the current lack of a clear regulatory regime in certain key jurisdictions. This is a huge opportunity for the UK FCA which is a Tier One regulator which has taken a lead in providing regulatory clarity,” he said.
CFTC commissioner Kristin Johnson called on Tuesday for a tougher stance on clearing crypto derivatives in the US, marking the latest intervention in an increasingly complex US regulatory picture on crypto.
GFO-X is an institutional-grade cryptocurrency derivatives platform, which involves a multi-faceted approach, said Sen.
“There is no silver bullet to drive institutional participation in crypto, but I’d suggest firms need to understand the questions being asked and deliver a service that solves all of their requirements. The cost of capital – i.e. margin – is one issue but the operational issues are equally as important.”
Looking ahead to launch, Sen said he is confident about building liquidity on the platform, a key challenge for start-up exchanges.
“We know the large players in the business and that is reflected in the calibre of the people we have hired and the advisors to our board. We also need a broad spectrum of clients and that is something we are working very hard on.”
Looking further ahead into next year, Sen said Bitcoin and Ethereum futures and options are the obvious opportunities: “From a product development point of view, there is not currently much institutional demand outside of Bitcoin and Ethereum so they are our focus in the short-term.”
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