ANALYSIS: LCH SA gears up to start clearing cryptocurrency derivatives
23rd December, 2024|Luke Jeffs
As well as her ambitious plans in credit and repo, Corentine Poilvet-Clédière, chief executive officer of LCH SA, is also leading the LSE Group-owned clearing house’s first foray into cryptocurrency derivatives.
This marks a new business line for LCH SA, called DigitalAssetClear, but also poses some interesting questions as one of the world’s oldest and safest clearing houses moves into a relatively new and notoriously volatile asset class.
Poilvet-Clédière told FOW: “We received the regulatory approvals in April this year and the pre-go live conditions from the regulation are closed, so from that perspective we are ready and are working towards a Q1 2025 launch, when the banks will have completed their testing phase.”
FOW first reported in October that GFO-X, which secured last December $30m (£24m) in a funding round led by M&G Investments, was moving ahead with testing with a view to launching early in 2025.
The LSE Group has historically adopted a position of open access, meaning it promotes competition by working with multiple counterparts.
Asked if LCH SA will work with other crypto derivatives exchanges going forward, Poilvet-Clédière gave a nuanced answer: “We’re focused on building the service with GFO-X, a UK-based FCA regulated MTF, and then we’ll take it from there. We are open access and always have been, but equally if we want to build something meaningful, we have to be focused.
“After that, if there are meaningful exchanges that meet the required criteria, we will talk to them, but that’s stage two.”
LCH clearing bitcoin derivatives will have raised some eyebrows among its more traditional members, prompting questions about the extent to which those firms will be exposed to any defaults that might take place in DigitalAssetClear.
Poilvet-Clédière is precise on this issue. “Our services are segregated and DigitalAssetClear is fully segregated to the point that it has its own waterfall of financial resources, its own membership criteria and rulebook. That gives the banks the occasion to start fresh and measure the risk appetite they want to apply to this space and step into it with their eyes wide open. The full segregation element of the service is a big differentiator.”
Another question is how do you set margin requirements and default contributions in an especially volatile asset class that has only been around for a few years?
The LCH SA chief said: “From our point of view, the question is: “Do you have enough history?” If you look at the history of options, futures and Bitcoin and you look at the biggest shocks, you’d be averaging around the biggest equity shocks.
“So if you build from an equity type of service, while you are absorbing the risk of the biggest Bitcoin shocks, another risk to consider is custody, so you need to cash-settle for the foreseeable future. That firms will be able to trade futures and options on the Bitcoin reference index counters volatility.”
GFO-X, which two weeks ago announced the backing of ABN Amro, Standard Chartered, IMC and Virtu, is trying to establish itself as the institutional-grade crypto derivatives market where professional investors like hedge funds, asset managers and investment banks trade.
Poilvet-Clédière sees LCH SA and DigitalAssetClear playing an important role in that ambition: “It's essential that we find ways to offer regulated, segregated and trusted routes to get exposure to this underlying for institutional investors so we are excited about the launch of DigitalAssetClear.”
