LSE joins battle between exchanges for crypto derivatives

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The London Stock Exchange Group plans to start clearing crypto derivatives, joining the battle between the world’s major exchanges to capture some of the growing institutional demand to trade digital assets.

The British group will use the Paris branch of its clearing subsidiary, LCH, to manage risks on bitcoin futures and options traded on GFO-X, a regulated British market, the company announced on Thursday.

His decision comes despite waves of bankruptcies among crypto companies, a sharp drop in token prices, and a series of enforcement actions by US regulators. Over the past three months, the price of bitcoin has climbed more than 50%, outpacing the performance of many other markets.

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

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

Many of LSE’s biggest rivals, such as CME Group, CBOE Global Markets and Deutsche Boerse, have all stepped up their offerings to clients who integrate crypto assets into more traditional products and services.

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

For this to happen, there needs to be a framework that they know and feel comfortable with, which at this point is traditional market infrastructure, a regulated market place and [clearing house].

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

Investors can leverage their positions and increase the size of profits, but adverse market movements can also lead to outsized losses.

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

Sen, who previously founded hedge fund Harbor Capital, said institutions couldn’t really enter the market unless they were reassured that their counterparty wouldn’t default.

In traditional markets, this risk is resolved through a [central counterparty clearing house], he added. A clearing house sits between two parties in a transaction, helping to manage the negative fallout if one party defaults.

LCH is the largest derivatives clearinghouse in the world, but the business is largely housed in its London branch. The Paris branch of LCH will settle derivatives in cash and the margin of its crypto unit will be held separately.

DigitalAssetClear will have its own default fund and its own set of rules to avoid any contagion effects, Soussan added. At no moment [will LCH SA hold] the physical bitcoin asset that removes much of the risk, he said.

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

The Paris branch of LCH aims to start clearing crypto derivatives in the fourth quarter of the year, subject to regulatory approvals.

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