„Micro Ether Futures Allow Precise Trading“
Many crypto investors have been keen for December 6 to arrive. On this date, CME, the world‘s largest derivatives exchange, expands its cryptocurrency offering. “The launch of our Micro Ether futures is based on similar reasons as the introduction of our Micro Bitcoin futures in May,” says Tim McCourt, Global Head of Equity Products at CME Group, whose team is also responsible for alternative investment products. “Our regular Ether contracts represent the cryptocurrency’s price, multiplied by fifty. When we first introduced Ether futures, the price was pushing 500 dollars.” Today, the second largest cryptocurrency is trading at around 4500 dollars. As the contract gained in size due to the appreciation of the underlying asset, investors increasingly asked for a more accessible avenue of participation. “As such, in addition to our Ether contracts, we are launching Micro Ether contracts which represent one tenth of one Ether, hence allowing more precise trading and risk management. It also allows us to bring in more individual investors who want to start trading cryptocurrency futures and scale their strategy up and down during shorter periods of time,” McCourt stresses. CME will continue to offer larger contracts – the regular Bitcoin contract, for example, includes a multiplier by a factor of five. Thus, when Bitcoin reaches 60000 dollars at the close of trading on any given day, the contract settles at 300000 dollars.
Interaction With ETF Providers
CME first offered cryptocurrency futures in 2017, starting with a Bitcoin product. In February 2021, the exchange introduced its first Ether futures. Recently, CME has prominently featured in discussions regarding the crypto sphere as several asset managers launched Bitcoin Exchange Traded Funds (ETFs) based on the company’s futures. “We always meant for our contracts to become creation units for the first cryptocurrency ETFs,” McCourt says. “Asset managers like ProShares and Valkyrie, who have launched Bitcoin vehicles, are existing clients in other asset classes, so we were already engaged with them on their risk management.” According to McCourt, CME also helped clients with their ETF filings, especially regarding the question why futures-based ETFs are sufficient to meet regulatory requirements.
Several asset managers have also applied for Exchange Traded Funds that track Bitcoin directly. However, the SEC continues to reject such proposals, as the supervisory authority stresses that futures-based vehicles offer a larger measure of investor protection. Recently, it has denied applications for spot-based Bitcoin ETFs by asset managers VanEck and WisdomTree.
Meanwhile, the introduction of futures-based Bitcoin ETFs has caused trading activity in the underlying contracts to spike. According to CME, the largest share of the volume occurs in the front month contract. “However, we do see a respectable amount of trading in the second and third month for Bitcoin and Ether contracts. The activity is a little more balanced than in our equity index contracts,” McCourt says. However, market participants are raising questions pertaining to concentration risks, as the new ETFs are responsible for a significant share of the open interest in the crypto futures. “Our market regulation department continually monitors trading activity, and position limits help us in making sure that market participants can’t have an undue impact on the price discovery process,” McCourt stresses. CME emphasizes that it only raises position limits after a manual review process that takes into account the deliverable supply of the underlying asset as well as current market dynamics. “Since launch, the Exchange has increased position limits gradually, and will continue to monitor the limits’ appropriateness to ensure integrity in a growing market rather than simply set them to the calculated amount allowed by traditional deliverable supply analysis,” McCourt says.
Large Block Trades
So far, Bitcoin ETF providers have mostly converted their inflows into the futures market at the settlement price, leading to large block trades at the close of trading. “Investors need to keep in mind that each of these block trades is balanced,” McCourt says. “Concentration would be much more lop-sided if ETFs spaced out their trades over the course of the day and bought from individual investors instead of interacting with large institutional participants.”
CME’s crypto futures contracts expire on the last Friday of the month and converge to the spot market at that point. The underlying CME CF reference rates are based on dollar-rates for Bitcoin and Ether on five different crypto exchanges: Bitstamp, itBit, Coinbase, Gemini and Kraken. Trading venues are eligible as constituent exchanges in CME’s crypto products if they facilitate spot trading of the asset against the corresponding fiat currency. This means that reference rates for Bitcoin can’t be transmitted in Tether, a stablecoin that‘s pegged to the dollar.
To gain admittance, trading platforms also have to meet minimum thresholds: The average daily volume would have contributed during the observation window for the relevant reference rate must exceed 3% for two consecutive quarters. “Crypto exchanges also need to comply with Know Your Customer and Anti Money Laundering standards and share information regarding spot market transactions in order to be included. This way, we can make sure that nobody is trying to manipulate the reference rate nor the future,” McCourt says.
Demand for a transparent price discovery process was one reason for CME to get involved in the crypto market in the first place. McCourt is convinced that this demand still exists today, even though Coinbase has become a publicly traded company and other crypto exchanges are expected to follow suit. “Of course, a publicly traded company has to fulfill more regulatory requirements, but that doesn’t change the dynamic by which it assembles market data,” the product specialist emphasizes. “There still is no spot market regulation for crypto currencies in the US. Thus, we definitely see demand for established and trusted financial institutions like CME to get more involved in that sphere.”