SEFs are trading platforms that operate under the CFTC’s regulatory oversight for trading and processing swaps. TeraExchange allows participants to trade swaps for interest rates, bilateral contracts and bitcoin forwards. SEFs were authorized to be created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to provide greater pre-trade and post-trade transparency to the swaps market.
TeraExchange provides the world’s first regulated bitcoin index – the Tera Bitcoin Price Index (TeraBit) – creating a benchmark for portfolio valuation. They were also approved to operate as a SEF by the CFTC in May, along with a couple of other SEF companies.
In an update from the exchange, they have announced that they added Bitstamp and OKCoin bitcoin exchanges to the TeraBit price index, which acts as a settlement benchmark for non-deliverable bitcoin forwards, as well as bitcoin binary option products.
The TeraExchange bitcoin forward is a short-term, U.S. Dollar settled forward. On the contracted settlement date, the profit or loss is adjusted between the two counterparties based on the difference between the contracted rate entered into on trade date and the prevailing Tera Bitcoin Price Index at the time of settlement.
What are bitcoin forwards?
To explain a bitcoin forward, think of it like this:
If you believe the bitcoin price will increase, you can buy a Forward. If you believe the bitcoin price will decrease, you can sell a Forward. Think about it similar to buying and selling bitcoins. Forwards can be used to hedge dollars even though the contracts are denominated as bitcoin per contract. Forwards are private contracts between two parties. All of the money in the trade is covered by the two traders who take opposite sides of the coin. The exchange that provides forward contracts puts no money in to fund the traders’ margin. With Futures, the contracts are mostly covered with funds provided by the exchange.
OKCoin has been one of the few bitcoin exchanges on the market which has provided futures and derivatives trading. Bitstamp on the other hand hasn’t had this feature, however, recently Bitstamp has said that the next iteration of the exchange will include leveraged trading. Leverage is often used in forex trading to trade one currency, such as the US Dollar (USD), to another currency, such as Bitcoin (BTC).
Last year, TeraExchange added Independent Reserve bitcoin exchange to their global bitcoin benchmark.