CryptoWatch: Brokers say bitcoin futures contracts ignore risks

Plans by U.S. exchanges to launch bitcoin futures and options this month came under fire from an organization representing the world’s largest derivatives brokers, including all of Wall Street’s major banks, raising questions about the prospects for the eagerly awaited contracts.

In a letter to Commodities Futures Trading Commission Chairman J. Christopher Giancarlo, the Futures Industry Association late Wednesday complained that the process that allows exchanges to “self-certify” and quickly list new contracts, while well-suited to run-of-the-mill products, falls short for “novel products” like bitcoin. Read the letterhere.

“A more thorough and considered process would have allowed for a robust public discussion among clearing member firms, exchanges and clearinghouses to ascertain the correct margin levels, trading limits, stress testing and related guarantee fund protections and other procedures needed in the event of excessive price movements,” said FIA Chief Executive Walter Lukken, in the letter.

“The recent volatility in these markets has underscored the importance of setting these levels and processes appropriately and conservatively,” Lukken wrote.

Bitcoin soared above $16,000 on Thursday, continuing a torrid rally that’s taken the cryptocurrency up more than 1,500% in 2017.

CME Group Inc. CME, -0.01%   and Cboe Global Markets Inc. CBOE, +0.63%  last week moved to launch bitcoin futures under the self-certification process. Cboe’s contract, which will trade with the ticker symbol “XBT,” will launch on Sunday, while the CME plans to introduce its contract on Dec. 18.

In a statement, Cboe defended the process, saying it worked closely with the CFTC for several months leading up to the product certification.

“This process included rigorous vetting and enhancements to the design, settlement, margining and surveillance process for XBT futures, both with the regulator and our clearing house, the OCC,” the exchange said. “When trading commences on Dec. 10, we [are] committed to continue to work closely with the CFTC to monitor trading and foster the growth of a transparent, liquid and fair bitcoin futures market.”

CME didn’t respond to a request for comment in response to the FIA letter.

The FIA said clearing members are worried about their exposure to bitcoin via exchange clearinghouses, which effectively serve as counterparties to every trade on a futures exchange.

“A public discussion should have been had on whether a separate guarantee fund for this product was appropriate or whether exchanges put additional capital in front of the clearing member guarantee fund,” Lukken wrote.

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