The vocal warnings of systemic risks stemming from the launch of Bitcoin futures contracts have been exaggerated, according to rating agency Moody’s. The company has issued a report that is downplaying the significance of the contract, at least if trading persists around current volumes.
Moody’s elaborated that the creditworthiness of the entities that are participating in the Bitcoin futures market is not going to get affected. The announcement is at odds with a number of financial markets professionals, including the CEO of Interactive Brokers Thomas Petterfy, that the contract can create material risks to the financial system.
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Strong Risk Management practices at central counterparty clearing houses (CCPs) are complimented by low trading volumes and the conservative leverage policies applied by futures exchanges.
Volatility Still a Challenge
While the volatility of the asset is still a challenge for risk management departments, those are deemed manageable. The sharp moves in prices make the job of CCPs to close out a defaulting clearing member's exposures more difficult.
The challenge is offset by the relatively high margin requirements which the CME and the CBOE have set for the contract. Counterparty exposure is mitigated by the 50 and 66 percent collateral requirements that are set but the futures exchanges. The firms have increased margin requirements from those they first presented to regulators in October 2017.
“We expect the CME and CBOE to make conservative adjustments to these margins in response to changing market conditions - namely, a sudden rise in the volatility of Bitcoin prices - as a risk and credit control measure," Moody's Analyst Fadi Abdel Massih says.
Bitcoin Futures Retail Broker Risk Contained
The report by the top rating agency also highlights that retail brokers that are offering to their clients Bitcoin futures should be safe. Companies such as Interactive Brokers, TD Ameritrade and E*TRADE transfer the conservative policies and margining of the contract from the exchanges onto the retail clients.
Moody’s also found that retail brokers have adopted a cautious approach to the contract. Some firms are requiring pre-qualification for customers to trade Bitcoin futures. At the same time they are strictly adhering to the high margin requirements. This risk management tool protects the brokers' exposure at the clearing house in a scenario where a customer defaults on a position.
“The margin that a broker requires from its customers is typically at least 10% more than the margin required by the clearing house from the broker, an important risk mitigation,” Massih says.
Crypto Exchanges Main Risk to Futures
The report by the ratings agency is highlighting that the main operational risk to bitcoin futures is the use of unregulated cryptocurrency spot exchanges. While both the CME and the CBOE use their own approach to determine the reference rate for Bitcoin futures, the companies are still relying on price discovery based on the rates quoted by a number of entities that lack regulatory oversight.
