Big Banks Block Client Access to Sunday’s Bitcoin Futures

December 9, 2017 14:23 UTC

Big banks are not rushing to facilitate investment in the first bitcoin futures market that goes live on Sunday. Citigroup Inc. and Bank of America Merrill Lynch have told customers they will not provide access to the cboe bitcoin futures that goes live on Sunday, according to The Wall Street Journal.

Goldman Sachs Group Inc. which is the U.S.’s largest futures broker, will reportedly only give access to certain customers. ABN Amro Group, similarly, will handle trades for a select group of clients, according to an email.

Societe Generale SA and Morgan Stanley have not finalized their approach, according to sources interviewed on Thursday.

Banks Play Key Role

For many investors, banks play a key role in providing access to new markets.

Banks’ hesitation could compromise the hotly anticipated bitcoin futures launch, which cryptocurrency advocates see as a key step in cryptocurrency’s evolution. Cboe Global Markets Inc. plans to launch its bitcoin futures on Sunday less than two weeks after regulators approved the launch. CME Group Inc., also in Chicago, will launch bitcoin futures on Dec. 18.

Cboe did not release a list of banks that will handle its bitcoin futures, citing confidentiality, but said the contracts would launch as planned.

Bitcoin topped the $16,000 mark on Thursday, a $4,000 gain in one day.

Wall Street Faces Choices

Bitcoin’s surge has made it hard for many on Wall Street to ignore it, despite concerns over its connections to illegal activities and its shaky legal status. Banks want to manage their risks but cannot ignore investor interest.

A trader must open an account with a brokerage, which could be liable for losses. Many brokers are struggling with a way to handle bitcoin futures risks due to its volatility. Banks serve as a buffer to counterparties in their role as futures brokers.

Brokers, in evaluating bitcoin futures, must consider their relationships with clients and decide if they should charge higher fees to “backstop” bitcoin futures trades. This is a difficult task considering bitcoin’s volatility.

Exchanges set minimum margin requirements traders must post in cash to enter a futures bet. Hence, exchanges have faced the same challenge. Cboe said on Monday that its clearing house raised the minimum from 33% to 44% on account of bitcoin’s volatility over the past few days.

CME’s minimum is 35% on contracts. The exchange could adjust this level in response to volatility, a CME spokesperson said.

Typhon Capital Management, a hedge fund firm, will trade Cboe’s bitcoin futures in one of its funds. James Koutoulas, CEO, said only three of 12 brokers the fund deals with have given them the approval to trade bitcoin futures.

Bank clients include institutional investors and larger hedge funds. Such players could find it hard to access Cboe’s futures, which would undermine trade activity in Cboe’s new market, said Craig Pirrong, a University of Houston finance professor.

Small Brokers See Opportunity

The reluctance of some banks has created an opportunity for smaller brokers such as Wedbush Securities Inc. and Phillip Capital Inc. to offer access to bitcoin futures.

Bob Fitzsimmons, managing director at Wedbush’s futures arm, said this window has created an opportunity with customers the company has been courting for several months.

Interactive Brokers Group Inc. will provide customers access to Cboe’s bitcoin futures for “long” traders betting on a bitcoin price increase, according to CEO Thomas Peterfly. This would protect the brokerage should bitcoin futures skyrocket and cause possible losses among “short” traders betting on a price drop.

A Goldman Sachs spokesperson said that given that bitcoin futures is a new product, the company is conducting due diligence.

Also read: Wall Street bankers revolt against bitcoin futures contract launch

Brokers Group Raises Concern

The FIA, which represents big futures brokers, said they are concerned about the risk of bitcoin futures.

FIA told the CFTC that the regulatory agency did not permit for proper public transparency and input in examining Cboe and CME’s bitcoin futures proposals.

A CFTC spokesperson said the agency agrees bitcoin is a commodity not like any other the commission has addressed.

Featured image from Shutterstock.

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