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Moody's Reports Risk of Bitcoin Futures is Moderate at Current Volumes

Traders Magazine Online News, February 23, 2018

John D'Antona Jr.

One ratings agency is looking more closely into bitcoin futures and their effects on exchanges and retail brokers.

In a new report by Moody’s, “Exchanges and Retail Brokers: Risk of Bitcoin futures is moderate at current volumes,” the agency writes that CME Group Inc. (CME, Aa3 stable) and Cboe Global Markets, Inc. (Cboe, Baa1 positive) recent launch of Bitcoin Futures contracts is not anticipated to affect the creditworthiness of either entity, owing to strong risk management at central counterparty clearing houses (CCPs), low futures’ volumes and the futures’ exchanges conservative approach to managing Bitcoin exposure.

The agency added that the price volatility of Bitcoin presents risk management challenges for CCPs which makes it more difficult to close out a defaulting clearing member’s exposures. To manage this risk, both CME and Cboe set relatively high margins for Bitcoin futures trades to mitigate counterparty exposure, and have increased margin requirements from those they first presented to regulators in October 2017.

The report also notes the risk is contained for retail brokers as well. The firms that offer the products, such as TD Ameritrade Holding Corporation (TD Ameritrade, A2 stable) and E*TRADE Financial Corp. (E*TRADE, Baa3 review for upgrade) maintain conservative policies and margining to account for Bitcoin’s high price volatility. The cautious approach from retail brokers includes pre-qualification for customers to trade Bitcoin futures as well as an adherence to high margins. This risk management tool protects the brokers’ exposure at the clearing house in a scenario where a customer defaults on a position. 

The report's executive summary noted the following:

Futures exchanges conservatively manage their Bitcoin exposure, but the short history and high volatility of the cryptocurrency is a risk management challenge. Bitcoin’s price volatility presents particular risk management challenges for CCPs, making it more difficult to close out a defaulting clearing member’s exposures. To manage this risk, both CME and Cboe set relatively high margins for Bitcoin futures trades to mitigate counterparty exposure, and have since upped margins from those they first presented to regulators. For now low volumes also limit potential losses to a CCP.

Retail brokers are carefully monitoring the vulnerability of client accounts to price movements. TD Ameritrade, E*TRADE and other retail brokers providing Bitcoin futures trading also require high margins from their clients to trade the contracts. Their margins are significantly higher than those set by the CCPs, a risk averse approach that will help limit online trading volumes, customer default risk but also commission income. Clearing margins
will remain in flux, and may rise rapidly and significantly in response to higher spot Bitcoin
price volatility, and brokers will have to adhere to these changes.

The underlying price of futures contracts is a function of unseasoned spot exchanges, introducing operational risk. CME and Cboe use different methodologies to determine the reference rate for Bitcoin futures, but they both rely for price discovery on newly established cryptocurrency exchanges (spot exchanges) that have historically lacked meaningful regulatory oversight. These spot exchanges are fast-growing, making them vulnerable to fraud, cyber-attacks, theft and user growth in excess of traffic capacity. Relying on these
unseasoned spot exchanges opens CME and Cboe to operational and cybersecurity risks that
could cause them reputational harm.


Contact Moody's for the full report

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