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November 28, 2023 - Market structure for crypto derivatives trading is set to evolve rapidly over the next three years as a new generation of onshore regulated trading venues launch, a study from Acuiti has found.
The Future of Digital Asset Market Structure in Europe, which was released today and produced in association with D2X Group, argues that the future market structure of crypto derivatives in Europe will incorporate elements of both crypto native and traditional markets.
The paper explores attitudes to elements of the market structure forged by native offshore crypto derivatives exchanges. Partly by design and partly by necessity, native crypto derivatives markets have forged a new market structure, less reliant on intermediation and with more functions operated by exchanges.
This has brought benefits in terms of lower costs of access and greater efficiency of trading. However, weaknesses, such as the elevated concentration of risk at the exchange, have also been exposed by the collapse of FTX.
The report, which is based on a survey of senior executives at 64 firms in the crypto derivatives markets, asked what the optimal market structure for trading crypto derivatives would be.
It found that market participants favour elements of the native market structure such as lower initial margins and having an option to access the venue directly as well as going through an intermediary such as a broker.
The survey found that the biggest challenge of the current availability of onshore crypto derivatives markets, which currently are offered by traditional exchanges, is the lack of weekend trading.
While crypto is a 24/7 market, current TradFi markets do not offer clearing over the weekend, exposing investors to risk of price moves. In addition, the absence of weekend clearing increases margin requirements.
“Innovations in native crypto derivatives market structure have valid applications in onshore regulated markets,” says Will Mitting, founder of Acuiti. “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.”
“Regulatory compliance and insolvency remoteness or 24/7 trading and capital-efficiency, this is the trade-off of market participants are facing in Crypto Derivatives."
“Traditional centrally cleared markets offer the former, while Crypto-native exchanges facilitate the latter. D2X is pioneering a new generation of market infrastructure that solves for this by taking the best features of both worlds.’, says Theodore Rozencwajg, CEO & Co-Founder of D2X Group.
The report also included a survey of intentions to adopt crypto derivatives once regulations were in place. This was conducted over the summer across Acuiti’s institutional networks.
The crypto market is anticipating several tailwinds in the coming years emanating from the anticipated SEC-approval of an ETF in the US, the halving of bitcoin in 2024 and the introduction of regulations covering crypto trading in the UK, Europe and other key jurisdictions.
While the EU’s Markets in Crypto Assets Regulation (MiCA) does not cover derivatives trading regulatory clarity surrounding areas such as spot trading, issuance and custody will increase overall flows into the market benefitting derivatives.
The outreach found that there is significant latent demand from institutional investors to trade crypto derivatives on regulated, onshore markets.
However, that demand is not uniform. Demand is strongest among proprietary trading firms. Of those not currently trading crypto, 67% would either be certain to trade (16%) or consider trading (51%) crypto derivatives once regulatory frameworks were in place. This falls to 27% and 9% respectively for hedge funds and 25% and 5% for asset managers.
D2X is on track to launch the first EU-regulated (MiFID) Crypto Futures & Options MTF out of the Netherlands to facilitate the institutional adoption of the asset class. Its unique post-trade model ensures an insolvency-remote and capital-efficient trading experience, 7-days-a-week. Targeting March 2024, its initial product listing is set to feature cash-settled EUR-denominated BTC and ETH derivatives.
The full report ca be downloaded from Acuitis here.
