LSE joins battle between exchanges for crypto derivatives

The London Stock Exchange Group plans to begin clearing crypto derivatives, joining the battle among the world’s big exchanges to grab a slice of rising institutional demand to trade digital assets.

The UK group will use the Paris arm of its clearing subsidiary, LCH, to manage the risks on bitcoin futures and options traded on GFO-X, a UK regulated marketplace, the company said on Thursday.

Its move comes in spite of waves of bankruptcies among crypto companies, sharp declines in the prices of tokens and a series of enforcement actions by US regulators. In the past three months the price of bitcoin has climbed more than 50 per cent, outstripping the performance of many other markets.

The move is also a coup for France, which has set itself up as one of the most open crypto havens in the G7 and sought to lure big companies into setting up offices and regional headquarters in Paris.

Asset managers and traders have turned to crypto derivatives as many of them cannot trade coins due to regulatory and compliance concerns.

Many of the LSE’s biggest rivals, such a CME Group, CBOE Global Markets and Deutsche Boerse have all stepped up offerings to customers that wrap crypto assets in more traditional products and services.

Frank Soussan, head of LCH DigitalAssetClear, the new LCH unit for clearing digital assets, said there was a lot of demand from institutional investors to trade

For it to happen “there needs to be a framework which they are familiar with and comfortable with which at this stage is traditional market infrastructure, a regulated market venue and regulated [clearing house]”.

Derivatives such as futures and options products allow traders to bet that the price of an asset will rise or fall in a certain timeframe while only funding a fraction of the value of their trades.

Investors can leverage their positions and boost the size of profits but adverse market moves can also lead to outsized losses.

Founded in 2020, GFO-X is run by a group of former hedge fund managers and clearing and settlement executives. Arnab Sen, its co-founder, said he “set the company up specifically to provide institutional access to the digital asset space.”

Sen, who previously founded hedge fund Harbour Capital, said that institutions could not really get into the market unless they were reassured that their counterparty would not default.

“In traditional markets, that risk is solved for via a [central counterparty clearing house],” he added. A clearing house sits between two parties in a transaction, helping manage adverse fallout if one side defaults.

LCH is the world’s largest derivatives clearing house but the business is largely housed at its London arm. LCH’s Paris arm will settle the derivatives with cash and the margin for its crypto unit will be held separately.

“DigitalAssetClear will have its own default fund and its own set of rules in order to prevent any contagion effect,” added Soussan. “At no point in time [will LCH SA hold] the physical bitcoin asset which removes a large component of the risk,” he said.

To calculate its margin levels, LCH SA will use a reference rate built by GFO-X and crypto data firm Coin Metrics that draws prices from seven exchanges, Soussan added.

LCH’s Paris arm aims to begin clearing crypto derivatives in the fourth quarter of the year, subject to regulatory approvals.