A major step forward in the world of crypto trading is on the horizon as CBOE Digital is becoming the first U.S.-regulated crypto-native combined exchange and clearinghouse, enabling both spot and leveraged derivatives trading on a unified platform.
With a focus on trust, transparency, and responsible innovation, CBOE Digital is adopting an intermediary-inclusive model to mitigate conflicts of interest and promote a level playing field for all participants. This integrated exchange-clearinghouse model paves the way for the introduction of unique and innovative offerings in the crypto space in the coming year.
CBOE Digital has unveiled its strategy to launch trading and clearing in margin futures on Bitcoin and Ether starting January 11, 2024. Tthe company aims to become the first U.S.-regulated crypto-native combined exchange and clearinghouse, facilitating both spot and leveraged derivatives trading on a unified platform.
CBOE Digital has implemented an intermediary-inclusive model that separates duties to prevent conflicts of interest. This exchange-clearinghouse model positions the platform to introduce innovative offerings in 2024.
Initiating with financially settled margined contracts on Bitcoin and Ether, CBOE Digital plans to expand its product suite to include physically delivered products at a later date, subject to regulatory approvals.
The margin model is structured to enable customers to trade futures without the need to post the full collateral upfront, enhancing capital efficiency compared to non-margined futures trading.
Notably, CBOE Digital’s consolidated spot and derivatives trading platform facilitates easy market access, creating opportunities for additional capital and operational efficiencies.
The upcoming launch of margin futures by CBOE Digital has garnered support from leading firms in both the cryptocurrency and traditional financial markets, including B2C2, BlockFills, CQG, Cumberland DRW, Jump Trading Group, Marex, StoneX Financial, Talos, tastytrade, Trading Technologies, and Wedbush.
John Palmer, President of CBOE Digital, highlighted the potential of derivatives to enhance liquidity and hedging opportunities in the crypto market, viewing it as a crucial step in the ongoing growth of the digital assets market.
“Futures have long served as valuable hedging instruments in the traditional financial markets, and we couldn’t be more excited to extend access to this tool further into the digital assets markets and offer margined trading for our customers. We believe derivatives will foster additional liquidity and hedging opportunities in crypto and represent the next critical step in this market’s continued growth,” he said .
Margin trading is a practice where users borrow funds to purchase stocks. It’s a trading strategy fraught with risk, demanding the user to deposit cash into a brokerage account as collateral for the loan and to pay interest on the borrowed capital.
Margin trading, also referred to as buying on margin, empowers users to leverage borrowed funds, enabling them to make more substantial investments than their available resources would allow. However, delving into stock purchases with borrowed money exposes users to the potential of incurring heightened losses.
Upon opening a new brokerage account, users might be presented with the option to opt for a margin account. This type of brokerage account permits users to deposit cash and subsequently borrow a larger sum to invest in securities.
Margin trading operates as a form of secured lending. When users secure a loan from their broker for margin trading, the loan is backed by the investments they purchase, akin to how a home equity line of credit (HELOC) is secured by the home itself. Regulations impose a cap on users, restricting them to borrowing up to 50% of an investment’s purchase price. Additionally, brokerages may enforce other limitations on the extent to which users can borrow for margin trading.
Engaging in margin trading comes at a cost, as users are obligated to pay interest on the borrowed funds from their broker. The interest rate, which fluctuates among brokers, depends on both the borrowed amount and prevailing market conditions. Margin interest rates can span from 4.75% to 12%, and users are liable for interest payments regardless of the performance of their investments.
In the event that the value of securities held in a margin account plunges to a level where the account equity falls below the minimum maintenance requirement, users will encounter a margin call. This necessitates an additional deposit to meet the maintenance requirement, as stipulated by the broker.
Failing to meet a margin call deadline may result in forced liquidation by the broker. In this scenario, the broker possesses the authority to sell the securities acquired on margin without prior notification, even if such action leads to substantial user losses.
Conversely, to the amplified profits mentioned earlier, margin trading intensifies potential losses. If the value of securities purchased on margin experiences a rapid decline, users not only forfeit their equity investment but also accumulate debt to the broker for the loan.
Caution is advised regarding margin calls. In the event of a margin call, prompted by a significant drop in the price of a security bought on margin, the brokerage issues an alert requiring additional cash or marginable securities to be deposited, or existing securities to be sold, to meet the mandated minimum equity. Failure to meet the margin call may lead to the sale of securities in the account. In periods of extreme volatility, a brokerage firm might sell securities to fulfill a margin call without prior notification.
The company has granted access to crypto spot and futures markets for a while now. Through the integration of professional tools, advanced technology, meticulous regulatory oversight, and a diverse array of products, it delivers workflows that are compliant and conducive to capital markets for participants in the digital space. Supported by some of the largest trading firms and financial institutions globally, Cboe Digital introduces transparency and reliability to the digital asset class.
CBOE Digital Futures are made available through Cboe Digital Exchange, LLC, a CFTC-registered DCM, and Cboe Clear Digital, LLC, a CFTC-registered DCO. It’s essential to note that the CFTC lacks regulatory oversight authority over certain virtual currency products, including the spot market trading of virtual currencies.