Tim McCourt, CME Group global head of equity index and alternative investment products, came to the crypto space from traditional finance, similar to many other market participants. He has been with the CME Group for about eight years running their equity index business line and their alternative investment products.
Prior to that, he spent more than a decade as an equity swap trader in the U.S. He then moved to the exchange, where they started looking at bitcoin and seeing what made sense for their customers. McCourt joined host Teana Baker-Taylor to discuss bitcoin and ether futures at the CME.
The CME Group’s first foray into crypto was in the reference rate with partner Crypto Facilities, which is now CF Benchmarks. They wanted to provide transparency to customers in terms of what is the prevailing level of bitcoin in dollar terms. That’s when they noticed some of the further needs around risk management outside of just knowing what the price is, and they evolved from just the reference rate in real-time indices to the tradable product world as their launch in December 2017.
(4:03) “From that point on, over three years ago, there’s been no looking back as far as it’s been a great ride, a lot of fun to work on and really excited to see how customers have adopted the product,” said Tim.
Back in 2016/2017, the CME was working on designs and validating customers. They’ve always been focused on an institutional-grade product in terms of not only providing hedging or risk management needs to some of the trading firms and crypto native companies, but when you think about how other firms and institutions can access the market or use the futures in lieu of trading the digital asset to assess the risk make the investment. And that was something the CME identified early on and also why they went with the five-BTC multiple contracts back in 2017.
(5:49) “So the institutional flow was already there. But I think what we’re seeing in the last particularly six months to one year is really the rise of even more traditional institutional clients. And that’s been a lot of fun to watch,” said Tim.
The CME watches large open interest holders, which is a number that is reported by the CFTC. For bitcoin, at CME, it tracks the number of traders holding 25 or more futures, or 125 or more equivalent of bitcoin.
(6:27) “That’s a pretty large position when you think about it. And that number has consistently grown over the years, peaking in December 2020 at about 110 large traders as a record. Right now, we are at just about 90 this week, so still very high,” said Tim.
For the markets the CME trades in, regulation is a feature and not a bug, Tim noted. And when you engage with institutions, they really want that tested, trusted environment in an exchange and venue that they can trade on. They welcome the fact that it’s a regulated venue. The CME is a 180-year-old trading venue and organization, so there is a great deal of trust there. When you also look at the fact that it’s regulated, that gives further credence to their internal approval efforts.
(8:49) “Trading on a regulated venue in the US and inside that regulatory framework gives a lot of comfort and confidence for them to make that leap into crypto. So we do think it’s a helpful onramp into the space….(9:21) So at CME, the fact that you can trade bitcoin futures the same way you trade e-mini S&P 500 futures, that’s a really good thing for getting people to make that final step to go from interested to investor,” said Tim.
ETH futures represent CME’s third cryptocurrency product. In addition to launching bitcoin futures in 2017, they also launched BTC options in January 2020.
(10:10) “Launching new products can be a challenge. Building new markets in the futures market space presents unique challenges. And then when you look at things like building those markets on something that is still new to people, that is crypto, it’s a lot of fun but also a lot of challenge,” said Tim.
Despite those challenges, the CME has had a really successful first few trading sessions. They’ve traded a little under 4,400 futures contracts at this point, with a 50-ether multiplier on those futures contracts. It’s a little under 220,000 ether equivalent, and they have just under 1,000 lots of open interest eight trading sessions in.
11:07 “When we look at the ether equivalent and ether volume, it’s doing about 50% of the futures volume that bitcoin futures did in those first seven, eight trading sessions,” explained Tim.
They are seeing block trades, outright trades and spread trades in a few of the first ETH contracts. They are all a great sign of any market, let alone one that is only a week and a half old. The CME Group launched ETH futures in response to customer demand but that is not the only factor. They also must make sure that they can build that market to satisfy demand.
(14:42) “With cryptocurrency, something that we’ve seen is there’s a very balanced participation where people have very different needs at different times to manage their risk or access the market, which really makes us believe that we have the ability to provide an efficient, robust, transparent price discovery mechanism with the futures. Certainly, that’s what we’ve seen with BTC over the last three years and certainly, we’ve seen that early days with ether,” said Tim.
The CME’s ether futures are cash-settled. As far as physically settled contacts, they don’t view it as an either-or decision. Customers are focused on financial contracts but some have expressed an interest in the physical contracts.
CME Group trading hours differ from the 24-hour nature of cryptocurrency spot markets. The CME gap has even found its way to Twitter. But the CME offers nearly 24-hour trading Sunday night from 6 p.m. Eastern through Friday 5 p.m. Eastern. The system is down for maintenance over the weekend, but not just for crypto. It affects all of the thousands of contracts they have listed at the CME. So it would be tough to focus on trying to fix that just for crypto, Tim said, adding that the feedback they have received from clients is that it’s not an impediment.
The CME launched ETH futures on Feb. 8. They traded a few hundred contracts on the first day and that exceeded their expectations. (23:10) It was a “wild success,” Tim said, because of what they were able to build in a fairly still nascent and new marketplace.
In addition, about 55 accounts traded ETH products on the first day, and to have both liquidity providers and end-users or “customer paper” show up on day one is an “enormous success,” he added. Volume sustained its growth, there is growing open interest and on a recent day they traded over 1,000 futures contracts, more than doubling the volume in a week and a half.
In a rapid-fire round with Teana on contract expirations, Tim revealed the following:
For BTC and ETH futures, they have the six nearest monthly contracts that expire on the last Friday of the month and they will always have the two nearest Decembers.
One thing the CME has seen with cryptocurrency that doesn’t always materialize this early or sustain is there has been a lot of spread quoting and spread trading going on in BTC and ETH. This helps the order book in terms of the depth of the curve.
ETH has not triggered a circuit breaker yet.
(28:00 ) Traders should check with their clearing members and the CME website, but at last check, now that the exchange has two cryptocurrency futures, they can offer some capital efficiencies between the two. At present, that offset is 50%. So there is a 50% offset between the BTC vs. ETH in the right ratio given the contract size differences.
As for the CME Group’s roadmap, BTC futures, BTC options and ETH futures will keep the team busy for a while. You can learn more at CMEGroup.com/trading/bitcoin-futures or CMEGroup.com/trading/ether-futures.