The LSE joins the battle between exchanges for crypto derivatives

The London Stock Exchange Group plans to start clearing crypto derivatives, joining the race among the world’s major exchanges to take a bite of growing institutional demand to trade digital assets.

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

The move comes despite waves of bankruptcies among crypto companies, sharp declines in token prices and a series of enforcement actions by US regulators. Over the past three months, the price of bitcoin has risen more than 50 percent, outperforming many other markets.

The move is also a coup for France, which has positioned itself as one of the most open crypto havens in the G7 and has sought to lure major companies to set 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 as CME Group, CBOE Global Markets and Deutsche Boerse, have all stepped up their offerings to clients who wrap crypto-assets in more traditional products and services.

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

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

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

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

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

Sen, who previously founded hedge fund Harbor Capital, said institutions could not really enter the market unless they were assured that their counterparty would not default.

“In traditional markets, this risk is resolved via a [central counterparty clearing house],” he added. A clearinghouse sits between two parties to a transaction, helping to deal with unwanted fallout if one side defaults.

LCH is the world’s largest clearing house for derivatives, but the business is largely located in the London branch. LCH’s Paris arm will settle the derivatives with cash and the margin for the crypto unit will be kept separately.

“DigitalAssetClear will have its own default fund and its own set of rules to prevent contagion,” Soussan added. “Not at any time [will LCH SA hold] the physical bitcoin asset that removes a large part of the risk,” he said.

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

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