New acronym; DCO. Derivative Clearing Organization. Just when you mastered ICO, BTC, etc, here comes a BIG one. The financial trading world has just come out of the egg (hatched) after lots of planning. First, LedgerX got CFTC approval to offer options on cryptocurrencies (Bitcoin) and then the CBOE is launching futures and options on bitcoin. Just like the Options Clearing Corp helped facilitate the success of listed options these DCO's are gonna make the derivative trading in cryptos explode. Great read and long overdue.
(Bill Taylor/CEO)
PS: BTW, that's The Fifth Dimension in the image performing "Age of Aquarius" (link to 1969 video here). Watch it, it's really fun!
"In what was a bustling month in crypto-land, one of the more important industry events may have been lost in the news flow.
We're talking about LedgerX, a startup whose board members include, among others, Mark Wetjen, a former Commodity Futures Trading Commission (CFTC) commissioner, and its successful registration as a derivatives clearing organization (DCO) with the CFTC – the primary U.S. derivatives regulator.
While the first registration of a DCO intending to offer cryptocurrency-linked derivatives is significant in and of itself, the approval was granted alongside a letter providing LedgerX exemptive relief from some of the onerous requirements that (justifiably) apply to DCOs.
This article discusses those details, as well as what impact the registration might have more broadly.
1. Clearing derivatives: an overview
First, let's clear up clearing.
"Clearing" a contract (or "swap") as opposed to a security, means that a transaction, which may be entered into bilaterally or an exchange or other trading platform, is then legally transferred to a central counterparty (a CCP, or in the CFTC's nomenclature, a DCO).
This is in comparison to an uncleared swap, which remains bilateral between the buyer and seller (which means they remain exposed to each other's credit risk). In a cleared swap, the CCP acts as a central counterparty for each buyer and seller, and effectively "guarantees" performance (to the extent it has the resources to do so).
CCPs are beneficial because, among other things, they ameliorate default risk and allow participants to offset transactions entered into with multiple counterparties. But if there's one thing that Satoshi taught us, it's that centralization carries its own systemic risks – that's why CCPs are subject to significant regulatory requirements and oversight.
It's worth pausing at this point to note that earlier in July, LedgerX also registered as a swap execution facility (SEF). This is a separate regulatory designation. An SEF is a trading platform through which users can view indicative pricing and quotations, and trade and transact in derivative products..."