CME to launch Bitcoin derivatives trading in December

December 4, 2017 by Cameron Bishop

In a major development, which might lead to worldwide official recognition of Bitcoin, the US Commodity Futures Trading Commission (CFTC) confirmed late Friday that it has approved listing of Bitcoin derivatives in the futures exchanges run by the US based CME Group and CBOE. The CFTC also stated that Cantor Exchange was granted permission to offer Bitcoin binary options.

Futures contracts allow traders to speculate on the rise or fall in the price of an asset without having ownership. CME has announced that it will facilitate trading in Bitcoin futures from Monday, December 18, 2017. Each derivative contract will represent five Bitcoins. A margin money or “good faith” deposit of 5% to 10% would be required to open a long or short position.

For example, if Bitcoin trades at $10,000 and if a trader expects further appreciation in the price, a sum of $2,500 to $5,000 (5% to 10% of 10,000×5 = $50,000) is required to buy one contract, and vice-versa. CME also stated that the Bitcoin futures contract will have a tick (minimum price movement) of $5. To avoid liquidation of positions, a trader has to maintain the margin deposit by adding funds, in a case the price moves against the open position.

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The future price of Bitcoin will be initially allowed to move within a band of +/- 7%. If the price hits the upper or lower limit, then trading will be halted for two minutes. After the halt time, the price band will be increased to +/-13%. If the price hits the upper limit again, then the band will be increased to +/-20%. There will be no extension to the 20% limit and the contract will be allowed to change hands only within that limit for the rest of the day. The trade will be cash-settled on the basis of Bitcoin Reference Rate (BRR), which is published on a daily basis by CME since November 2016.

The listing of Bitcoin in a regulated derivatives exchange such as CME and CBOE is expected to attract institutional investors. Interestingly, NASDAQ is also expected to launch Bitcoin trading in the first-half of 2018.