Moody's: Bitcoin futures volatility mitigated by risk management at exchanges, clearing houses and retail brokers

Moody's - CME Group Inc. (CME, Aa3 stable) and Cboe Global Markets, Inc. (Cboe, Baa1 positive) recent launch of Bitcoin Futures contracts is not anticipated to affect the creditworthiness of either entity, owing to strong risk management at central counterparty clearing houses (CCPs), low futures' volumes and the futures' exchanges conservative approach to managing Bitcoin exposure, Moody's Investors Service says in a new report. The price volatility of Bitcoin presents risk management challenges for CCPs which makes it more difficult to close out a defaulting clearing member's exposures. To manage this risk, both CME and Cboe set relatively high margins for Bitcoin futures trades to mitigate counterparty exposure, and 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. Risk is contained for retail brokers as well. The firms that offer the products, such as TD Ameritrade Holding Corporation (TD Ameritrade, A2 stable) and E*TRADE Financial Corp. (E*TRADE, Baa3 review for upgrade) maintain conservative policies and margining to account for Bitcoin's high price volatility. The cautious approach from retail brokers includes pre-qualification for customers to trade Bitcoin futures as well as an adherence to high margins. 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.

However, operational risk is introduced to the underlying price of future contracts due to the use of unseasoned cryptocurrency spot exchanges. CME and Cboe use different methodologies to determine the reference rate for Bitcoin futures, and they both rely for price discovery on newly established cryptocurrency exchanges that have historically lacked meaningful regulatory oversight.

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