Undeliverable futures could be an effective way for institutional investors to use crypto products within their existing regulatory and compliance frameworks, according to a Greenwich Coalition investigation.
The consulting firm said in a report that NDFs are relatively easy to manage due to their over-the-counter nature, flexible 24-hour access, and the ability for contracts to expire on tailored days. NDFs are derivatives that are used to hedge or speculate against currencies when currency controls make it difficult for foreign investors to settle in physical cash, for example, the Chinese renminbi.
– Coalition Greenwich (a division of CRISIL) (@CoalitionGrnwch) November 2, 2021
Subodh Karnik, head of customer intelligence marketing at Coalition Greenwich, said in a statement: “Virtually any major liquidity provider would be able to start with NDFs and build markets. “
Other crypto derivatives have started trading. The CME group introduced bitcoin and ether futures and bitcoin futures exchange-traded funds were listed in the United States, although the Greenwich Coalition noted that they had challenges. For futures, the high volatility of crypto assets creates margin and offsetting issues. ETFs have a create / redeem process that requires smooth access to the physical market and ETF price hedging can be difficult during volatile times
Therefore, NDFs could support institutional buyers’ interest in cryptocurrencies.
Duncan Trenholme, co-head of digital assets at TP ICAP, told Markets Media in July that the company is developing OTC derivatives for crypto assets such as foreign currencies. He said, “If you’re from an FX department, you naturally look at a Bitcoin / US dollar pair through the lens of your other FX products and an NDF (non-deliverable) is very familiar.”
In June of this year, TP ICAP announced its intention to launch a wholesale platform for cryptoassets in collaboration with Fidelity Digital Assets, Zodia Custody and Flow Traders, subject to registration with UK Financial. Conduct Authority.
However, the survey indicated that one of the challenges to the wider adoption of NDF is participants’ preference for crypto trades on limit order books and central exchanges.
Banks and brokers in the survey expect a third of the crypto volume in the coming years to be executed on fully decentralized exchanges, while the long side believes less than 15% will be traded by investors. non-SEC / CFTC sites. In contrast, fintechs expect about half of the volume to go through this channel.
Coalition Greenwich expects a shift to multilateral platforms or an aggregate central limited order book before bilateral trade takes off. The consulting firm believes that pioneers in providing platforms will have a significant advantage.
In the investigation, 24Exchange chief exchange Dmitri Galinov told Coalition Greenwich that the company and its partner banks are adapting NDFs for cryptocurrency. He said 24Exchange was in a strong position as a pioneer with a crypto derivatives exchange license from the Bermuda Monetary Authority.
“The big market players we spoke with are inclined to choose NDFs as the most likely derivative for this to happen,” Coalition Greenwich added. “But customer demand for neutral platforms with reliable staging capabilities will lead these venues to be the choice of market makers and cash consumers looking for transactions to match and book management. orders.”
American derivatives FTX
On November 2, FTX US announced that Mark Wetjen, former CFTC commissioner, has joined the US-regulated cryptocurrency exchange as head of regulatory policy and strategy.
Wetien was previously Managing Director of MIAX Futures, where he focused on crypto derivatives and strategic initiatives. He was also a member of the board of directors of LedgerX, the first licensed crypto-native derivatives exchange in the United States. FTX US completed the acquisition of LedgerX in October and the exchange was renamed FTX US Derivatives.
Brett Harrison, Chairman of FTX US, said in a statement: “We created FTX US Derivatives with the intention of becoming the first regulated cryptocurrency exchange in the United States to provide crypto-derivatives exchanges to our base. users, and Mark’s experience and advice will be instrumental in achieving this goal. “
The acquisition gave FTX US a CFTC-regulated Designated Contract Marketplace (DCM), a Swap Execution Facility (SEF) and a Derivatives Clearing Organization (DCO). These will be available 24/7 for retail and institutional investors and will provide block trading and algorithmic trading opportunities for institutional investors.
big day at FTX US Derivatives:
– Zach Dexter (@zachdex) November 2, 2021
Zach Dexter, Managing Director of FTX US Derivatives, said in a statement, “As the regulatory environment for the crypto ecosystem continues to evolve, we look forward to acting as a resource and an example of how whose protections offered by appropriate regulatory oversight and licensing can enhance consumer confidence and facilitate secure and reliable trading platforms. The most important facet of this acquisition of LedgerX is that it allows us to do so. “