Crypto derivatives trading structure to ‘evolve rapidly’, says Acuiti study
29 November 2023 UK
Image: Maksim Kostenko/stock.adobe.com
The market structure for crypto derivatives trading is to “evolve rapidly” over the next three years, following the launch of onshore regulated trading venues, according to an Acuiti study.
The management intelligence platform says the future market structure of crypto derivatives in Europe will incorporate elements of both crypto native and traditional markets.
The Acuiti report is based on a survey of senior executives at 64 firms in the crypto derivatives markets and explores attitudes towards elements of the market structure forged by native offshore crypto derivatives exchanges.
Titled The Future of Digital Asset Market Structure in Europe, and produced in association with D2X Group, the study notes that the native crypto derivatives markets have forged a new market structure that is less reliant on intermediation.
Acuiti highlights that the new structure has led to more functions being operated by exchanges.
As a result, this has led to lower costs of access and greater efficiency of trading. However, this transition has also resulted in an elevated concentration of risk at the exchanges.
According to respondents, lack of weekend trading represents a barrier to the growth of onshore crypto derivatives markets.
Current traditional finance markets do not offer clearing over the weekend, exposing investors to risk of price moves, explains Acuiti. In addition, the absence of weekend clearing increases margin requirements.
There is a demand from proprietary trading firms to trade crypto derivatives on regulated, onshore markets. However, hedge funds and asset managers are less likely to be considering these venues, the firm adds.
According to the report, the new crypto derivatives market structure was “forged out of necessity by the absence of traditional sell-side intermediation” and had brought “significant innovation” to market.
The collapse of cryptocurrency exchange FTX exposed serious flaws in certain elements of how the crypto markets had evolved — including the elevated counterparty risk to the exchange that native crypto market structure created through the requirement to hold cash on the exchange to collateralise trading positions.
Acuiti says this risk is being addressed through innovations in custody and triparty collateral management. It adds that institutional firms are increasingly onboarding off-exchange custody offerings to increase collateral efficiency.
The firm concludes: “A market structure in which firms can have direct access to a regulated venue offering 24/7 trading with lower initial margins protecting against default through a remote custody agreement solves many of the challenges exposed by FTX and brings the best of the innovations from the crypto markets into the regulated world.”
Commenting on the study’s findings, Acuiti founder Will Mitting says: “Innovations in native crypto derivatives market structure have valid applications in onshore regulated markets. Ultimately the native market structure of crypto derivatives will come together with the traditional market structure to create the market of tomorrow.
“Many of the innovations in the crypto native world, such as real time margining and risk management, will inevitably become part of global markets across both traditional and digital assets.”
He adds that regulatory compliance and insolvency remoteness or 24/7 trading and capital-efficiency is the “trade-off” market participants are facing in crypto derivatives.
The management intelligence platform says the future market structure of crypto derivatives in Europe will incorporate elements of both crypto native and traditional markets.
The Acuiti report is based on a survey of senior executives at 64 firms in the crypto derivatives markets and explores attitudes towards elements of the market structure forged by native offshore crypto derivatives exchanges.
Titled The Future of Digital Asset Market Structure in Europe, and produced in association with D2X Group, the study notes that the native crypto derivatives markets have forged a new market structure that is less reliant on intermediation.
Acuiti highlights that the new structure has led to more functions being operated by exchanges.
As a result, this has led to lower costs of access and greater efficiency of trading. However, this transition has also resulted in an elevated concentration of risk at the exchanges.
According to respondents, lack of weekend trading represents a barrier to the growth of onshore crypto derivatives markets.
Current traditional finance markets do not offer clearing over the weekend, exposing investors to risk of price moves, explains Acuiti. In addition, the absence of weekend clearing increases margin requirements.
There is a demand from proprietary trading firms to trade crypto derivatives on regulated, onshore markets. However, hedge funds and asset managers are less likely to be considering these venues, the firm adds.
According to the report, the new crypto derivatives market structure was “forged out of necessity by the absence of traditional sell-side intermediation” and had brought “significant innovation” to market.
The collapse of cryptocurrency exchange FTX exposed serious flaws in certain elements of how the crypto markets had evolved — including the elevated counterparty risk to the exchange that native crypto market structure created through the requirement to hold cash on the exchange to collateralise trading positions.
Acuiti says this risk is being addressed through innovations in custody and triparty collateral management. It adds that institutional firms are increasingly onboarding off-exchange custody offerings to increase collateral efficiency.
The firm concludes: “A market structure in which firms can have direct access to a regulated venue offering 24/7 trading with lower initial margins protecting against default through a remote custody agreement solves many of the challenges exposed by FTX and brings the best of the innovations from the crypto markets into the regulated world.”
Commenting on the study’s findings, Acuiti founder Will Mitting says: “Innovations in native crypto derivatives market structure have valid applications in onshore regulated markets. Ultimately the native market structure of crypto derivatives will come together with the traditional market structure to create the market of tomorrow.
“Many of the innovations in the crypto native world, such as real time margining and risk management, will inevitably become part of global markets across both traditional and digital assets.”
He adds that regulatory compliance and insolvency remoteness or 24/7 trading and capital-efficiency is the “trade-off” market participants are facing in crypto derivatives.
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