As the US increases its scrutiny of the digital-asset sector, one firm is now offering large institutional investors a way to trade crypto derivatives through a regulated platform meant to mirror traditional markets.
(Bloomberg) — As the US increases its scrutiny of the digital-asset sector, one firm is now offering large institutional investors a way to trade crypto derivatives through a regulated platform meant to mirror traditional markets.
Firms including SBI Alpha Trading Co. and QCP Capital Pte. have executed cryptocurrency options trades on Clear Markets Holdings Inc.’s platform and used automated collateral management on a blockchain network, the firms announced Thursday. The system enabled Tokyo-based SBI and QCP, headquartered in Singapore, to post Bitcoin as collateral using a custodian of their choice.
Given the implosion of crypto firms including Sam Bankman-Fried’s FTX followed by a Securities and Exchange Commission crackdown on Binance Holdings Ltd. and Coinbase Global Inc., institutional firms have sought a safer ecosystem to trade and improve collateral management.
“We’re bringing crypto-native participants, with all their liquidity, onto a regulated crypto-trading platform that is accessible to US investors, bridging the two worlds in a way that hasn’t happened with over-the-counter swaps, forwards and options,” Clear Markets Chief Executive Officer Mark Brickell said in an interview.
Clear Markets operates two regulated trading platforms. One is licensed in the US and is regulated by the Commodity Futures Trading Commission as a swap execution facility. The other, licensed in the UK, is regulated by the Financial Conduct Authority. The licensing is intended to allow investors to execute trading of both fiat and crypto derivatives. Traders can also post Ether as collateral under CFTC guidance in the US.
Traditional Market
Charlotte, North Carolina-based Clear Markets draws upon a model used in the traditional derivatives market for collateral management. Standards developed by the International Swaps Derivatives Association, or ISDA, a trade organization for derivate participants, were used to inform Clear Markets’ design of its own technology.
The Clear Markets system automatically identifies whether two parties have sufficient collateral to settle a trade before it happens. Once that’s confirmed, the collateral is locked at the custodian, and recorded using distributed-ledger technology developed by New York-based R3.
“Challenges in the crypto markets were driven by exchanges acting as custodians, operating in the dark, where users didn’t have 100% certainty where their funds were,” said R3 co-founder Todd McDonald. “In this case, all the rules are set up, clearly. You get automation and controlled transparency.”
Crypto derivatives gained in popularity despite the market’s turmoil, allowing investors to make bets on the price of Bitcoin or Ether without having to own the actual digital currency. CME, a US-based exchange regulated by the CFTC, has been offering crypto-futures products since 2017. But regulation has pushed the majority of derivatives trading in crypto, including options and futures, onto offshore exchanges such as Binance, OKX and, at one time, FTX.
SEC’s Crackdown
The SEC widened its crackdown on crypto through lawsuits against two of the industry’s biggest firms, Binance and Coinbase, alleging that they acted as unregistered securities exchanges, broker-dealers and clearinghouses. The firms have denied the allegations. SEC Chair Gary Gensler has long criticized existing crypto platforms for failing to separate different parts of their businesses, such as custody, market-making and trading, which could result in conflicts of interests.
While institutional interest in crypto investing has waned following a market crash and the collapse of high-profile firms including FTX last year, some traditional financial institutions have been laying the groundwork to participate in the crypto markets. BlackRock Inc., the world’s largest asset manager, filed last week to launch a spot Bitcoin exchange-traded fund.
Clear Markets executives include managing director David Maloy, who was chairman of the International Swaps Derivatives Association’s collateral committee for nearly a decade and ran collateral management at firms including UBS Group AG and Credit Suisse Group AG. Brickell served as chairman of the ISDA from 1988 to 1992 while he was a managing director at JPMorgan Chase & Co.
“After the recent SEC clampdown, everyone is looking for the legitimate players to step up,” said Chris Hehmeyer, chairman of Warwick Capital Management Ltd., a Bermuda-based crypto investment manager. The Clear Markets team “has been around financial markets for decades. They understand collateralized leveraged instruments.”
Clear Markets has plans to add additional firms to its platform in the coming months, President Shawn Dorsch said.
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