FTX US Aims to Reshape Futures Landscape11.22.2021
Brett Harrison, president of FTX US, said the US-regulated cryptocurrency exchange aims to change the futures trading landscape following its acquisition of a licensed derivatives business by increasing competition and enabling capital efficiencies.
In October FTX US completed its acquisition of LedgerX, which has been rebranded as FTX US Derivatives. The purchase allowed the cryptocurrency exchange to gain a designated contract market (DCM), swap execution facility (SEF) and a derivatives clearing organization (DCO) which are all regulated by the US Commodity Futures Trading Commission.
Harrison told Markets Media that when the deal completed the firm had an increase in sign-ups from institutions such as high-frequency trading firms and market makers who want to be able to trade regulated crypto derivatives in the US. Approximately 60% of FTX trading volume comes from institutions and Harrison expects this share to increase once derivatives are launched.
He said: “They have signed up for FTX US with the understanding that we are going to be able to offer derivatives in the near future. So they want to make sure they are on board now.”
FTX US Derivatives existing licences mean that the firm can self-certify products which then go through a review process with the CFTC.
“We are looking to make sure this is highly transparent and collaborative,” added Harrison.
5/ @SBF_FTX, @zachdex, @_Ryne_Miller, @MarkWetjen, and I are in regular, collaborative dialogue with regulatory agencies about how we can bring innovative products from FTX Intl to the US in a licensed and regulated way.
— Brett Harrison (@Brett_FTXUS) November 11, 2021
However, the licence only covers products are fully collateralized while Harrison explained that clients want to trade futures for capital efficiency. Therefore the firm is in discussions with the CFTC regarding implementing margins for futures and options – which involves the regulator reviewing FTX US Derivatives’ margin processes, risk model, and liquidation engine or backstop fund.
“The risk model is largely inspired by the FTX international platform which includes margins for futures, but does not have an CFTC licence because the overseas platform cannot be used by US customers,” added Harrison.
The CFTC has already approved bitcoin and ether derivatives at CME Group and Harrison said FTX US Derivatives will initially offer bitcoin and ether futures and options.
“We are new to the futures game in the US and our goal is to walk and then run,” said Harrison. “However, we have large ambitions to figure out what other crypto derivatives we can list and how can we make those products simpler and easier for retail to trade.”
Cboe Group has also announced an acquisition of ErisX in order to enter the digital asset space. Harrison explained that ErisX has a similar platform to FTX US Derivatives as a spot cryptocurrency exchange and a regulated DCM and DCO. However the licence also only allows collateralized products so once Cboe closes the acquisition, which is due in the first half of next year, the firm will also have to apply for a licence from the CFTC for margin products.
Harrison argued that FTX US Derivatives will be able to offer increased capital efficiency and portfolio margining. For example, at CME Group bitcoin cannot be used as collateral for its bitcoin futures.
“On FTX International you can put up bitcoin as collateral for your bitcoin future trade, but you can also use bitcoin as collateral for your ether future,” he added. “Portfolio margining is an innovation that we are looking to bring to US futures in a way that has not been done before.”
In addition, the FTX US Derivatives licence offers the opportunity to offer traditional financial derivatives.
Harrison said: “There’s no reason why, down the road, we couldn’t list an equity index or a traditional commodity future but these are possibilities and not our top priority. We think we have a real opportunity to reshape the futures landscape in the US in a market that is traditionally not very competitive.”
In the third quarter of this year FTX US reported that average daily volume grew 512% to $360m, reaching a peak total volume of $807m on 7 September.
The exchange said it had a share of approximately 4.5% of US crypto spot market volume at the end of third quarter, more than double the 2% at the start of the third quarter. User count also increased by 52% during the quarter.
— Yahoo Finance (@YahooFinance) November 11, 2021
Harrison said the firm will continue to focus on user growth through working on products, the user interface, the onboarding experience, continuing to launch new features such as its NFT platform and through its advertising and branding efforts. For example, the Miami Heat Arena has been rebranded the FTX Arena.
Harrison believes 2002 will be the year of regulation in crypto markets.
“As the market matures, the primary focus is going to be on how crypto exchanges change from ‘move fast and innovate’ to conforming to a regulatory policy or regime that allows the market to continue in the long-term,” he added.
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