What to Expect From Ledgerx's 'Physically-Settled' Bitcoin Options
Institutional trading and clearing platform Ledgerx is preparing to offer ‘physically-settled’ bitcoin options. The company is currently waiting for full regulatory approval from the U.S. Commodity Futures Trading Commission (CFTC) to trade and clear bitcoin options. Bitcoin.com caught up with CEO Paul Chou to find out more about their upcoming bitcoin derivatives products.
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Ledgerx has two registration applications pending with the CFTC. The first is as a swap execution facility (SEF), for which it received a temporary registration approval from the Commission in September 2015. The other is as a derivatives clearing organization 
(DCO), which any clearinghouse must register as before providing clearing services with respect to futures contracts, options on futures contracts and swaps.
“If approved, Ledgerx would be the first federally regulated bitcoin options exchange and clearinghouse to list and clear fully-collateralized, physically-settled bitcoin options for the institutional market”, the company’s website claims.
In December, Miami International Holdings (MIH) announced the completion of an investment in Ledgerx’s parent company, Ledger Holdings. Early investors of the company include Google Ventures and Lightspeed Venture Partners, a venture capital firm out of Menlo Park, California. The latest investment provides Ledgerx with “the capital that is critical to help us meet the minimum financial requirements necessary to be approved as a DCO and SEF by the CFTC”, Chou remarked at the time.
While pending CFTC’s approval, the company is “restricted from any live trading or clearing activities”, Chou told Bitcoin.com.
What Products Will Be Offered?
Bitcoin.com (BC): What and how many products will Ledgerx offer?
Paul Chou (PC): Ledgerx will initially list vanilla puts and calls on bitcoin with 
standardized strikes and expirations. Strikes will be in a range around the current spot price and expirations will be from one-to-six months in tenor.
BC: Where will these products be listed?
PC: The products will be listed on the Ledgerx SEF (Swap Exchange Facility) and cleared by the LedgerX DCO (Derivatives Clearing Organization). We’re an integrated exchange and clearing operation so all parts of the transaction lifecycle from contract listing, trade matching, to final settlement are handled by us.
‘Physically-Settled’ Instead of ‘Cash-Settled’
BC: Can you explain what “fully-collateralized, physically-settled bitcoin options” mean?
PC: Ledgerx’s focus is on physically-settled options. This means that the long holder of the option has the right to purchase, in the case of a call, or sell, in the case of a put, actual bitcoin. This is in contrast to derivatives that are cash-settled, where the holder receives fiat.
Many of our customers transact in bitcoin in the course of their business, so physically-settled options that deliver bitcoin are more useful to them.
BC: What is the benefit?
PC: Accepting bitcoin as collateral at the clearinghouse enables us to fully-collateralize physically-settled positions such as short call options, ensuring that the clearinghouse holds the full deliverable for all trades.
This model reduces risk for participants and enables comfort around clearing a new, volatile asset class. A long option holder will never have to worry about taking a forced haircut on his expected bitcoin deliverable.
Potential Customers
BC: Who can buy/trade Ledgerx products?
PC: Any participant who is an Eligible Contract Participant (as defined by the Commodities Exchange Act) may participate in trading on the Ledgerx SEF. Under this definition, retail would not qualify, but a range of hedgers and professional investors would be eligible.
BC: How much interest do you expect these products to garner?
PC:
We have significant demand from companies within the Bitcoin ecosystem, such as natural hedgers, as well as trading firms that are interested in the opportunity presented by a new options market.
BC: What is Ledgerx spending its time on while waiting for the CFTC’s approval?
PC: In addition to continuing various tests of the platform, we’ve been working on product development for other derivatives we can list down the line. We expect to have a range of interesting digital currency-related products that will suit both hedgers and investors / speculators; these products will look nothing like traditional financial derivatives and we aim to introduce them later this year.
What do you think of Ledgerx’s physically-settled derivatives products? Let us know in the comments section below.
Images courtesy of Shutterstock, Ledgerx, and CFTC
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