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CME and CBOE set to launch bitcoin futures in two weeks - BBH

"The Chicago Mercantile Exchange (CME) and the Chicago Board of Options Exchange (CBOE) will be launching futures contracts on the Bitcoin over the next two weeks," BBH analysts note.

Key quotes

Specifically, the CBOE contract is planned to launch its contract next Monday and the CME, a week later.   There is one key similarity between the two contracts: They are settled in cash.  The actual Bitcoins will be delivered.  

To settle, the contracts need a reference rate.  The CBOE contract uses the daily auction price by Gemini, which is run by the Winklevoss brothers.  The contract will trade about six hours a day, and the position limit (which is common in commodity futures) will be set at a net (long and shorts) of 5000 contracts.   The CME contract will be settled at a reference price created by an index of prices provided by four platforms.  There will be a 1000 contract position limit.   

Recall that margins in US equities are set by the Federal Reserve.  It requires that one borrows no more than 50% of equity purchase.  This type of margin is a down payment on one's purchase.  Margins in the futures market and over-the-counter are set very differently. They are set as a function of volatility.  Volatility is a risk.  This margin is best understood as a down payment on one's future loss. Given the volatility of Bitcoins, one should be prepared for a  high initial marginal.  On top of the initial margin, individual firms (futures brokers) will likely require a higher maintenance margin.

The decentralized nature of the cyber currency market means that neither prices from Gemini nor an index derived from prices at four exchanges may reflect actual dealing prices that are available elsewhere.   This may complicate efforts by market makers to arbitrage or otherwise manage risk.  Such futures contracts may also not be as helpful as some had hoped in the price discovery process.  Nevertheless, the futures contracts are seen as a part of the maturing of this market.   

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