TeraExchange, a New Jersey-based swap execution facility has launched its first regulated platform for Bitcoin derivatives and a spot BTC price index. The company that is registered with the Commodity Futures Trading Commission CFTC, announced the launch of the platform on Friday September 12th, 2014.
Growing Demand for Bitcoin Derivatives
In a press release, the company stated that the Bitcoin Derivatives and Bitcoin Price Index platforms were created to meet the growing demand by global merchants, payment processors, miners and hedge funds for an efficient hedging tool. This new platform comes on the heels of an unregulated swap execution facility launched in March 2014, by a TeraExchange affiliate.
Since then TeraExchange has worked closely with the CFTC to ensure that the swap execution facility and the index comply with all the applicable regulatory requirements for dealing in derivatives.
Leonard Nuara, President and co-founder of TeraExchange, said that the structure of the Bitcoin swap marketplace reflected “extensive client input” and it provided participants with several benefits including transparent price discovery and efficient risk transfer. He applauded the role of the CFTC and its staff whom he described as being “thoughtful, diligent and thorough in their analysis and review.”
The Tera Bitcoin Price Index uses an algorithm that compiles and filters data in real-time from several global bitcoin exchanges around the world. In order to be included in the index, the bitcoin exchanges have to agree to share information with TeraExchange, a requirement under the rules of the CFTC. Under the rules, TeraExchange remains the index administrator and the calculation agent for the Price Index.
Christian Martin, CEO and co-founder of TeraExchange, pointed out that a regulated bitcoin swap exchange facility provides clients with a more efficient way of hedging and trading. It also increases the degree of confidence in the clients while trading. He added that a “robust price index also helps the growing bitcoin trading community to accurately mark-to-market positions while establishing trust and stability in this growing global marketplace.”
What is a Swap Execution Facility?
A swap execution facility is a trading platform that enables multiple participants execute or trade swaps by accepting bids and offers made by other participants, and that are open to multiple participants on the trading platform through any means of interstate commerce.
To better understand what a swap is, it is important first of all to learn about derivatives. A derivative is a financial instrument whose price is dependent on or derived from an underlying asset. It could also be thought of as a contract between two or more parties, its value being determined by the fluctuations in the value of the underlying asset. The underlying assets typically used in computing derivatives are stocks, bonds, commodities, currencies, interest rates and market indices. They are used to hedge risk, but can also be used for speculation.
An example can help clarify matters. Say, for example, a London investor wishes to buy stock in a company listed on the New York Stock Exchange. The stock is quoted in US Dollars. By buying the stock in dollars, he will be exposed to the risk posed by the exchange rate while he holds that stock. To reduce or hedge the risk, he would then buy the type of derivative called a futures. A futures would enable him hold the stock until such a time in the future when he’ll be able to sell the stock at a specific price and exchange rate back into the British Pound. In this example, the stock becomes the underlying asset, and the futures becomes the derivative.
A swap then is a type of derivative in which two parties exchange financial instruments such as interest rates. Understanding this point is what makes the trading platform announced by TeraExchange such an exciting development for bitcoin. The swaps are traded with bitcoin as the underlying asset. The more the swaps are traded; the more bitcoin begins to appear as a stable currency, and hence help in curbing the extreme volatility that is currently being seen in the bitcoin price against the dollar.
This trade is now being carried out in the aftermath of the crisis of 2008, and the enactment in 2011 of the Dodd-Frank Act which introduced various far-reaching measures designed to better regulate the US financial system, and avoid the mistakes of the past. In 2008, weak regulation, overpriced derivatives and a collapsing housing market combined to bring about the worst financial crisis since the stock market crash of 1929.
The combination of an efficient regulatory regime and the company’s trading rules will lead to an environment that will enable bitcoin emerge as a viable digital asset.
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