Incidentally, this first bitcoin derivatives transaction happened on the same day that the Commodities and Futures Trading Commission is hosting the Global Markets Advisory Committee in Washington DC. The public meeting includes a bitcoin derivatives-based panel discussion among CFTC Staff, academics and bitcoin industry participants including TeraExchange.
The TeraExchange USD/Bitcoin swap enables institutional traders in an environment regulated by the CFTC. Traders can hedge and gain exposure to bitcoin using the TeraExchange swap execution facility subject to the rules set out by the CFTC.
“There is significant, growing demand for a hedging instrument like this,” said Christian Martin, CEO and co-founder of TeraExchange. “Not only does the swap provide a much-needed risk management tool, but it instills confidence and credibility to the entire Bitcoin community at a vital time in the market’s development.”
“We are delighted to be working closely with TeraExchange and are excited they have created a regulated platform for institutional traders,” said Bill Brindise, Chief Investment Officer at digitalBTC, a liquidity provider for bitcoin swaps on TeraExchange. “This swap is an important investment vehicle that has been sorely needed by bitcoin investors, retailers and miners. Like TeraExchange, digitalBTC is no stranger to regulation since stock exchange listing requirements mandate complete transparency into our business activities and financial reporting.”
In September 2014, TeraExchange filed for self-certification. TeraExchange worked closely with the CFTC for over six months as it prepared its self-certification to ensure that the swap and the Tera Bitcoin Price Index satisfied the rules and regulations of the federal regulator.
“The CFTC Staff was pragmatic in their approach and comprehensive in their analysis,” said Leonard T. Nuara, President and co-founder of TeraExchange, “and after months of refining the swap and the index we are excited that bitcoin derivatives trading has commenced on our platform.”
Under the regulations of the CTFC, certain designated contract markets or DCMs can launch trade in certain products without prior CFTC approval. A DCM is a board of trade or exchange that operates under the oversight of the CFTC. TeraExchange would, therefore, be treated as a DCM. Under the CFTC rules on DCMs, TeraExchange can list futures or options contracts based on an underlying asset. In the present case, TeraExchange has listed derivatives based bitcoin as an underlying asset.
To obtain recognition as a DCM, a company like TeraExchange must comply with a set of 23 core principles. These core principles protect the integrity of the market from disruption and ensure financial integrity of transactions. They also provide for disciplinary procedures and dispute resolution, and provide for standards on corporate governance.
In order to launch a product that is self-certified, a DCM would have to file a notification with the CFTC. Among other things, the product must comply with the Commodity Exchange Act and CFTC regulations. The notification must also include a concise explanation of the workings of the product and details on how it complies with all applicable laws.
The Tera Bitcoin Price Index will be used as the settlement rate for the USD/Bitcoin swap. The Index, which was launched by TeraExchange at the same time as its regulated platform last month, employs a dynamic algorithm that compiles and filters data on a real-time basis from a number of widely utilized global bitcoin exchanges. In order to be included in the Index, these exchanges are required to execute and maintain an information sharing agreement with TeraExchange as required by the CFTC.
TeraExchange is a global pioneer in the derivatives marketplace. It launched as an SEF in October 2013, providing a multi-asset class platform for trading of an array of financial instruments.
Images from TeraExchange and Shutterstock.
Last modified (UTC): October 11, 2014 16:11