What you need to know about Bitcoin Futures.
Starting from December 2017, the bitcoin rate has increased by more than 40% and its capitalization increased USD 200 billion for the first time in its nearly nine-year history. The bitcoin established a new historical high and reached the mark of USD 14,000 per cryptocoin. Analysts believe that one of the reasons for such an unusual growth of the oldest cryptocurrency is anticipation of the introduction of bitcoin futures. CME Group prepared a list of the most frequently asked questions about new futures contracts and gave answers to them. Let’s look inside this new derivative and find out how it works.
In this article:
- General information.
- Bitcoin Reference Rate (BRR).
- Information on commission and margin.
- Additional information.
- When does the CME Group plan to introduce the bitcoin futures contract trading?
CME Group plans to start the bitcoin futures contract trading on December 18, 2017.
- What is the connection between the bitcoin futures and its spot market?
The bitcoin futures price is identified by the CME CF Bitcoin Reference Rate (BRR), which aggregates the data of the bitcoin trading activity on the basic spot bitcoin exchanges during the period from 15:00 until 16:00 London Time.
- At what exchange will the bitcoin futures listing be carried out?
The bitcoin futures listing and clearing will be carried out on CME, registered in the Designated Contract Market (DCM) and Derivatives Clearing Organization (DCO).
- What normative and legal regulation will act in respect of the bitcoin futures trading?
The bitcoin futures trading and clearing will be regulated by the Commodity Futures Trading Commission (CFTC) – a regulatory body which has an exclusive jurisdiction in respect of the US bitcoin futures market.
- What does the process of self-certification with participation of the Commodity Futures Trading Commission envisage?
The Commodity Exchange Act (CEA) allows exchanges to carry out listing and independently certify new products for exchange trading, which correspond to the Commodity Exchange Act and regulatory provisions of the Commodity Futures Trading Commission. This is the most common method used by the CME Group and all other exchanges for issue of new futures products. CME independently certified new bitcoin futures on December 1, 2017, with participation of the Commodity Futures Trading Commission. Such a certification allows CME to officially conduct bitcoin futures listing from December 18, 2017 (note: introduction of the bitcoin futures trading didn’t require agreement of the regulatory authority from the technical point of view, but the Commodity Futures Trading Commission has the authority to slow down realization of these plans in the event of emergence of claims).
- What accounting procedure and other regulating mechanisms are envisaged by the local authorities for the bitcoin futures contracts?
As well as with other derivative instruments, the bitcoin futures position accounting procedure and the general order of local regulatory mechanisms of the bitcoin derivative trading could differ depending on the country and respective jurisdiction. The market participants bear personal responsibility for observation of all requirements imposed by the US and local authorities. The market participants, especially those who do not have experience of trading the bitcoin derivatives, should ask a professional consultant for help if it is required and expedient.
- What platforms will accompany the bitcoin futures trading?
The central book of limit orders will be accompanied with the CME Globex platform, while the clearing of the over-the-counter trading – with CME ClearPort and CME Direct.
- What are the contract specifications?
|Contract name||Bitcoin Futures|
|Contract size||5 bitcoins in accordance with the CME CF Bitcoin Reference Rate (BRR).|
|Minimum price step||USD 5.00 for a bitcoin = USD 25.00 for a contract. Calendar spread: USD 1.00 for a bitcoin = USD 5.00 for a contract.|
|Trading period||CME Globex and CME ClearPort: Sunday — Friday: 17:00 — 16:00 of the next day Central Standard Time (Chicago) with a daily 60-minute break from 16:00 CST (Chicago).|
|Listing cycle||The nearest two months in the March quarter cycle (March, June, September and December) plus two next nearest months which are not included into the March quarter cycle.|
|Stoppage of trading||Contract trading stops at 16:00 London Time on the last Friday of the contract month. If this day is not a working day in Great Britain and US, the trading stops the previous day, the most recent working day in Great Britain and US.|
|Position limits||The limit for a spot position is 1,000 contracts. The accounting level of the position of 5,000 contracts will be applicable to the positions in each specific month, except for the spot month, and in all months taken together. The volume, which is subject to accounting, is 25 contracts.|
|Minimum block||5 contracts.|
|Price fluctuation limits||The price fluctuation limits of the current working day is set with consideration of the most recent bitcoin futures settlement price, which is set every working day at 16:00 London Time. Special ‘soft’ price fluctuation limits are 7% and 13% above or below the previous settlement price and the ‘hard’ limit is 20% above or below the previous settlement price. Trading outside the limit of 20% above or below the previous settlement price is not allowed.|
|Settlements by the contract||Cost of the (settlement) contract is identified depending on the final settlement price, which equals the CME CF Bitcoin Reference Rate (BRR) on the last trading day.|
- Will the bitcoin futures be traded 24/7?
No. Unlike the daily published BRR (CME CF Bitcoin Reference Rate) Index, the bitcoin futures could be traded only during the time periods specified in the contract specifications (question No. 8).
- Will the block trades with bitcoin futures be allowed?
Yes. The bitcoin futures block trades will be allowed. They will be under requirements of provision of information in accordance with the Rule 526 of the Information Bulletin of Market Regulation. The minimum threshold for a block is 5 contracts.
- Will the bitcoin futures satisfy EFP/EFRP criteria?
Yes, the bitcoin futures will satisfy criteria of EFP (Exchange Futures for Physical – a trade on changing an exchange futures position to an equal one in the physical or cash market) and EFRP (Exchange Futures for Related Positions – a trade on simultaneous changing an exchange futures position to an equal offsetting position in the physical or cash market).
- Will the basis trade be accessible during the first day of the bitcoin futures trading?
CME Group will not offer the Basis Trade at Index Close (BTIC) during the first trading day, but will consider this issue in future in the course of development of this futures market and emergence of demand on the part of clients.
- How would the bitcoin futures daily settlement price be established?
Initially, the daily settlement price would be established on calculation of the Volume-Weighted Average Price (VWAP) of all trades on the CME Globex during the period from 15:59:00 until 16:00:00 London Time with its rounding down to the closest price low. CME will revise the process of establishment of the daily settlement price in the course of development of the bitcoin futures market.
- Will the bitcoin futures price fluctuations be limited?
Yes, the bitcoin futures fall under the action of limits of the daily price fluctuation in the amount of 7%, 13% and 20%. These limits are applicable to the growth and reduction of the price with respect to the bitcoin futures settlement price for the previous day. Please, note that the first two limits (+/-7% and +/-13%) are soft limits. It means that when the current contract reaches the upper or lower limit threshold, the 2-minute monitoring period is automatically initiated. The trading continues during this period within the frame of the acting price limit and cannot exceed it.
If the contract exceeds the acting price limit by the end of this 2-minute monitoring period, the trading will continue without a stop on extended limits of +/-13% and +/-20%, respectively.
And vice versa. If the contract will continue to stay within the framework of the existing limit by the end of the monitoring period, the trading will be stopped for 2 minutes and the contract will pass to the pre-open market state. The order matching will not be conducted during this period of time, but the orders could be posted, changed and canceled. The contract trading will be renewed after this 2-minute break on extended limits of +/-13% and +/-20%, respectively.
The limit of +/-20% is a hard limit. It means that if the contract is traded within the price fluctuation limit of +/-20%, a trading stoppage will not be initiated and the price fluctuation limit will not be extended. Instead, the trading will be continued within this limit of +/-20% during the rest of the trading session.
- How would the final settlement bitcoin futures price be identified?
The final calculation of the cost will be carried out on the basis of the CME CF Bitcoin Reference Rate (BRR) at 16:00 London Time on the futures contract expiration day.
- What is the maximum size of the bitcoin futures order in the CME Globex electronic trading system?
Initially, the maximum size of the order will be 100 contracts.
- Will the CME Group conduct the listing of options on the bitcoin futures?
Initially, CME will not conduct the listing of such options, but will revise this decision in the course of development of this futures market and emergence of demand.
- Which asset class will the bitcoin futures belong to?
CME subsumes the bitcoin futures under the equity indices and alternative products. In this connection, any questions with respect to the bitcoin futures introduction could be sent to email@example.com.
- Through what channel of the data transfer will this product be available?
The bitcoin futures market data will be available through MDP Channel 318 and also on the DataMine portal. Moreover, the market data of the CME CF Bitcoin Reference Rate (BRR) Index will be available 24/7 on the DataMine portal.
Bitcoin Reference Rate (Brr)
- What is the Bitcoin Reference Rate (BRR)?
The CME CF Bitcoin Reference Rate (BRR) is a daily reference rate, calculated by the one bitcoin to USD exchange rate at 16:00 London Time, was created by the CME Group together with the Crypto Facilities Ltd. company and is based on the principles of the International Organisation of Securities Commissions (IOSCO) for financial indicators. It takes into account indicators of the trading activity of the exchanges, which data are included into the calculation of this rate, and focuses on increasing stability and reliability of the bitcoin futures market.
- How is the BRR calculated?
It is calculated on the basis of respective bitcoin operations on all exchanges, which data are included into calculation of this rate, during the period from 15:00 until 16:00 London Time. The price and size of every respective operation is registered and added to the list divided into 12 equal time intervals of 5 minutes each. The volume-weighted median trade price is calculated for each such interval on the basis of the data of trading prices of respective operations of the exchanges, which data are included into the calculation of this rate. After that, the BRR is identified on the basis of the equally-weighted average of all median prices, weighted by volume, of all 12 time intervals.
- Where can I find more information about the exchanges, which data are included into the calculation of the BRR?
You can find more information here.
- Do the exchanges, which data are included into the calculation of the BRR, correspond with the requirements of the legislation: Know Your Client (KYC) and Anti-Money Laundering (AML)?
Despite the fact that all the exchanges, which data are included into the calculation of the BRR, are not regulated, each of them independently observes these legislative requirements.
Information On Commission And Margin
- What commissions will be charged for the bitcoin futures?
The bitcoin futures price will be set above the face value of the standard equity index futures but in accordance with the convention on prices of other premium products. Information about the commissions could be found in the table of the CME tariffs.
- Will CME introduce favourable bitcoin futures commissions?
Yes, CME will provide all the participants of this market with 50% discount on operations with spreads in the CME Globex until May 31, 2018.
- What exchange department will the bitcoin futures be entrusted to?
The bitcoin futures will circulate on CME and will be entrusted to its department which deals with the Index and Option Market (IOM).
- What margin requirements will be placed on the bitcoin futures?
The margin will be calculated using the method of comparative analysis usually used by CME for new contracts. The calculation of the initial margin size, which the Clearing Chamber will require, was 35% as of December 1, 2017, although its size could be revised in future. The margin compensation, if trading with other CME products, will not be applicable to this contract at the initial stage. Moreover, the Futures Commission Merchants (FCMs) may ask for the margin size above the minimum requirements, set by the CME Clearing Chamber.
- Will the maximum level of the bitcoin futures clearing responsibility be set?
We use a whole range of instruments of risk management with respect to the bitcoin futures. The CME Clearing Chamber preserves the right to introduce restrictions on possible losses, additional requirements to the capital and other measures, which facilitate efficient risk management in the event when it detects possible risks, which, in its opinion, may have an impact on another product or market. It should be noted that our bitcoin futures contracts are settlement ones. Due to this, the margin requirements will be set in accordance with the profile of volatility and liquidity of this product. Moreover, we also have a possibility to influence the firms-participants of the clearing and introduce trade limits or restrictions of possible losses with respect to their clients. Other measures may include increase of the size of the trading capital or margin requirements in those cases when possible risks exceed reasonable limits.
- Will the bitcoin futures be included into the Guarantee Fund of the CME Clearing Chamber?
The bitcoin futures will be included into the CME Main Guarantee Fund, created for the futures and futures options, as well as any new futures contracts that were included into the listing.
If you have other questions regarding the margin requirements or the CME Clearing Chamber approach to risk management, please, contact Lee Betsill (firstname.lastname@example.org) or Matt Waldis (email@example.com).
- Will there be authorized bitcoin futures market makers?
Yes, CME will present the loyalty program for the authorized market makers with the aim to support the bitcoin futures market development.
- What is the CME policy with respect to the hard fork (a change of the bitcoin code structure with the aim of creation of its various versions: gold, cash, classic and unlimited)?
CME develops the hard fork policy with the aim to collect information on operations of the bitcoin cash market when creating a competitive fork (a bitcoin version). This policy may include a correction of the money funds of the bitcoin futures position holders or conducting a listing of respective futures, distributed among the bitcoin futures position holders.
- How can I get access to the CME Globex electronic trading system?
To get access to the CME Globex, you should contact a CME Clearing Member Firm.
- Where can I find more information about the bitcoin futures introduction by CME?
To get the most recent information on these futures, please, go to http://www.cmegroup.com/bitcoinfutures.
- Where can I see the bitcoin futures prices?
The price quotes, broadcast with some delay, will be available on the cmegroup.com web-site. You will also be able to get access to price quotes of these contracts through the main suppliers (vendors) of these data.