Chicago Mercantile Exchange (CME) Chairman and CEO Terry Duffy gave an elucidating interview recently explaining why he decided to list bitcoin futures in the last quarter of 2017 as a deliberate effort to bring proven blockchain technology to well-financed clients who will help it gain maturity and clout.
Did the self-certification element of commodity exchange sour the enthusiasm for Bitcoin stocks investment?
Journalist Scarlet Fu of Bloomberg asked Duffy bluntly if the long held practice of self-certification within the commodities exchange industry exclude important players who were then burdened with unwanted Bitcoin stocks, poisoning the well for other potential investors? Mr. Duffy, CME Chairman, immediately refuted the claim.
“I don’t think it does,” he continued, “because we spent a lot of time working with all our clients, talking to them about all our products, educating them about what we’re thinking. At the same time, there is a competitive issue out there that you want to be cautious of. The self-certification process is a big part of why [bitcoin] was put into place [so quickly].”
The issue of industry self-certification has popped up recently due to Bitcoin’s giant drop in value of late.
It was even the central focus of Duffy’s first meeting of the year, as both CME and its rival, Chicago Board Options Exchange (Cboe), were asked to defend the tradition in direct contrast with standard stocks and their grueling gatekeeper, the Securities and Exchange Commission (SEC).
Mr. Duffy expanded on his answer to Ms. Fu: “[Our bitcoin futures product] didn’t have to go through a six month review (everybody could look at your intellectual property and do a copycat, lookalike product). We don’t have the same model as the Securities model. Ours is completely different. I think that the self-certification process works. We worked closely with our regulator. We worked more closely with them on this product because of the unique nature of this product.”
Regarding the self-certification issue, Mr. Duffy vehemently defends the decision to list Bitcoin.
“This product has been around for nine years. It’s not like it just showed up yesterday. Volatility [in traditional markets] has been low the last couple of years. What has not been low in volatility? It’s been bitcoin. People are clamoring for some kind of [volatility]. All of sudden this product becomes very much front page news. We’ve all been talking about bitcoin, and there’s been a lot of conversation,” he said.
“We list [bitcoin futures]… with a whole new group of standards. I said today on my shareholder earnings call I would not reduce any of those standards in order to make money on this product. I think it’s important we take a very slow approach to this, and make sure the product is rolled out properly.”
Ms. Fu countered with “so that high initial margin of 43% … under no circumstances would you lower that?” To put that in perspective, commodity margins are usually in the single digits. Mr. Duffy’s answer belies his belief in Bitcoin futures long term:
“That’s not what I said. I would not do that in lieu of trying to get volume on it. I think the product needs times to mature… One of the reasons we have a five bitcoin per contract, versus our competitors having a one bitcoin contract, is I wanted to make sure I did not attract what is referred to in the business as the ‘moms and the pops’ trading it. I wanted to make sure people had a really good idea about what they’re getting into. I don’t want to attract a craze of people attracting to a marketplace when they’re not quite sure what they’re doing,” he cautioned.
Duffy defended Bitcoin and the high margin rates while the sot price tanked.
He stated, “Now, you look at the price of bitcoin. When we listed it, it was at $19,500 day one CME listed it. Today, it’s around $9,000 a bitcoin. We have a 43% margin, as you referenced a moment ago; we have had an over 50% decrease in that product. We are still holding 43% initial margin on that product today. It goes to show you the risk management processes we have in place for all of our asset classes but especially something like this when people were concerned about a quick break or a quick rally.”
What do you think of Mr. Duffy’s defense of Bitcoin?
(To decide for yourself how Bitcoin stocks are progressing, read How are Bitcoin stocks really performing?)