CME Bitcoin futures announcement captures institutional investor attention

On Tuesday, CME Group — the world’s largest derivatives trading house by volume — announced that it will launch trading for Bitcoin futures contracts before the end of the year, pending approval by the U.S. Commodity Futures Trading Commission (CFTC). Bitcoin’s price has seen a steady bull trend since the announcement, rising more than ten percent the following day — and continuing to hit all-time highs throughout the week.

Trading is scheduled to go live as soon as regulators approve the contract, CME CEO Terry Duffy told CNBC, adding that he’s confident that an existing self-certification process CME has with the CFTC will suffice to get the new contract approved this quarter given the regulator is already familiar with the contract’s terms.

Although CME had launched two Bitcoin price-tracking rates about a year ago, the listing of a CME Group contract for Bitcoin was unexpected, given a recent statement by CME President Bryan Durkin at the end of September. “I really feel that bitcoin is very nascent right now,” he said. “I really don’t see us going forward with a futures contract in the very near future.” However, the price of Bitcoin has risen dramatically since then, and CME has decided to take advantage of the interest generated by this increase.

“Given increasing client interest in the evolving cryptocurrency markets, we have decided to introduce a bitcoin futures contract.”

— CME Group chairman and CEO Terry Duffy

The announcement is particularly significant for Bitcoin given the CME Group’s significant influence in world financial markets. The Group is the holding company behind the Dow Jones stock index and many of the world’s largest exchanges, including the Chicago Mercantile Exchange (Merc) which is the world’s largest derivatives exchange by volume.

The group also owns the New York Mercantile Exchange (NYMEX), the Commodities Exchange (COMEX), and the Chicago Board of Trade (CBOT), among other global finance and trading hubs. CME Group recently reported revenue of $891 million for 3Q 2017, with an average daily volume of 15.7 million contracts, which is up 10 percent from 3Q 2016. Investment contracts traded at Merc include currencies, stock indexes, forex futures, interest rate futures, and agricultural products — and if CFTC approval goes ahead Bitcoin will be the first cryptocurrency listed on the exchange.

A bitcoin futures contract will also greatly increase the probability that a bitcoin exchange-traded fund (ETF) will be approved. The U.S. Securities and Exchange Commission (SEC) had previously requested a few fund managers to withdraw their registration statements for bitcoin ETFs, since they had planned to invest in U.S. Exchange-traded bitcoin derivatives. Being an unregulated investment, the SEC would not allow ETF managers to invest directly in bitcoins, and had requested they wait until regulated derivatives for bitcoins became available.

Tuesday’s announcement may also be timed to beat out the CME’s largest competitor, the Chicago Board Options Exchange (CBOE). In August, a partnership was announced between the CBOE and the Winklevoss twin’s Gemini Exchange. The partners have plans to launch a cryptocurrency derivatives trading service similar to the one announced by Merc.

Located only a few blocks away from the CME Group world headquarters, the CBOE hosts trading for the largest volume of the world’s options contracts. Created to give institutional investors exposure to the new cryptocurrency market, the partners stated that the Bitcoin contract was designed to provide an avenue to hedge against traditional volatility. Although the trading service is scheduled to begin later this year, like the CME initiative it is still in the process of receiving regulatory approval.

Meanwhile, the CTFC has already approved LedgerX, an institutional trading and clearing platform to trade in cryptocurrencies. The New York-based exchange received approval from the CFTC as a Swap Execution Facility and a Derivatives Clearing Organization in July. LedgerX is the first regulated exchange and clearinghouse to list and clear fully-collateralized, physically-settled bitcoin swaps and options for the institutional market. Unlike any other regulated exchanges to date, the company allows its customer to settle in and take possession of actual bitcoins after their trades.

The platform began trading last month, and had completed swaps and options trades worth over $1 million in its first week. In July, LedgerX’s CEO Paul Chou told CNBC that the firm also plans to launch ethereum options.