Eurex is one of the leading international derivatives exchanges. As part of Deutsche Börse Group, Eurex offers a wide range of international benchmark products via open and low-cost electronic access. A conversation with Randolf Roth on its strategy surrounding digital assets.
Market participants are connected to Eurex from 700 locations around the world, generating an annual trading volume of more than 1.7 billion contracts. This makes it the world's preferred derivatives trading venue. As a lean company characterized by an entrepreneurial spirit, Eurex's top priority is to meet customer needs. The specialists on the Eurex team are always committed to ensuring that all investors can benefit from the advantages of a fully integrated organization - with cash and derivatives markets under one roof and the corresponding range of clearing and settlement services.
CVJ.CH: What status do you think digital assets have among institutional investors?
Randolf Roth: There is a clear trend among investors increasingly picking up cryptocurrencies. While professional investors have already been participating, a viewpoint shift occurs among traditional financial institutions from rejecting crypto to embracing it. However, the responses in our Digital Asset Trading 2021 report suggest that the adoption of cryptocurrency trading among institutional investors is at its early stage. Our report results show that while most buy-side institutions are currently less involved in cryptocurrencies than sell-side institutions, almost 40% of the buy-side institutions are interested in becoming active.
Moreover, the report highlights the main motivations for crypto involvement: trading opportunities (90%), growing confidence in crypto as an asset class (68%) and portfolio diversification (56%). Significant concerns are a lack of regulatory certainty (77%) and (trusted) custody solutions (68%). As a result, most respondents look at cash-settled futures to get exposure. The Digital Assets Trading 2021 report analyses the adoption of digital asset trading by institutional investors based on a survey conducted with both buy- and sell-side financial institutions active in derivatives markets.
How is blockchain technology changing the traditional financial system?
Potentially, DLT technology and the digitization of financial instruments could fundamentally change the value generation in the financial industry and the securities services markets. Within the realm of network-driven digital markets, infrastructures will increasingly facilitate end-to-end scenarios, such as end-to-end lifecycles of digital financial instruments, end-to-end processes to connect different market participants directly and end-to-end connectivity of different markets. Digital market infrastructure has the potential to enable instant issuance, distribution and settlement, as well as auto asset servicing. Furthermore, the range of asset classes could be extended, and the nature of financial instruments might change. The developments in DeFi and some digital asset markets show potential directions.
Will traditional exchanges and crypto exchanges merge in the future?
Currently, incumbent market infrastructures and trading venues have not merged with crypto and digital asset trading venues. This is mainly due to three reasons: first, most crypto trading venues still operate under low regulatory license or oversight. Second, the technological backbone of some of the trading venues is not fulfilling institutional-grade requirements. Last, the main client groups still diverge between a strong retail focus and institutional clients in the incumbent markets. But a specific conversion is already underway. On the one hand, hybrid products, like ETCs and futures, have been issued by exchanges to allow institutional clients to build exposure in crypto. On the other hand, digital asset marketplaces have taken steps into the regulated market sphere.
What does crypto mean for Eurex?
It extends our service offering to clients with an all-new assets class. As our mainly institutional clients seek access to this asset class, we facilitate this access in an environment that our clients are familiar with. At this stage, we provide our clients with a bridgehead into cryptocurrencies. Our chosen product structure allows clients to remain in the traditional financial infrastructure and take advantage of how the product mirrors the price developments in the crypto markets.
What are Eurex Bitcoin ETN Futures?
Eurex Bitcoin ETN Futures provide the first regulated European market in Bitcoin-related derivatives, giving the advantages of Bitcoin in the safety of a futures contract. The euro-denominated contract lets participants trade Bitcoin performance like any other Eurex product. They get full access to Eurex's trusted trading, clearing, and settlement infrastructure and none of the additional operational burdens typically imposed by cryptocurrency.
The contract is based on the BTC/ETC Exchange Traded Note (ETN) introduced on XETRA in June 2020 and has since become one of the most traded crypto ETP in the world. The underlying Bitcoin ETN (equivalent to 1/1000th of a Bitcoin at launch) is fully backed by and redeemable in Bitcoin. As a result, the price of the ETN closely tracks the Bitcoin/Euro exchange rate, and it avoids the cost of carry created by ETPs that create their performance using futures. In this way, with a futures contract that settles into the ETN, which, in turn, can be redeemed in Bitcoin, the product bridges the gap between the cryptocurrency markets and traditional financial infrastructure.
What hurdles will need to be overcome in the future to better integrate digital assets into portfolio allocations?
In our recently conducted survey amongst institutional clients, two main barriers to digital asset trading were mentioned: The unclear regulatory status and lack of custody solutions. The Eurex Bitcoin ETN futures mitigates both barriers. As mentioned above, the futures contract and its underlying trade in a fully regulated environment. The custody of the Bitcoin that the ETN represents is outsourced to a professional digital asset custodian. Another aspect mentioned in our survey, which is undoubtedly relevant for integrating digital assets into portfolio allocation, is the pricing and valuation of digital assets. Integrating digital assets into the risk scenarios that the overall portfolio is subject to will certainly be a challenge.
Despite their anonymous nature, can cryptocurrencies be reconciled with measures to prevent money laundering and terrorist financing?
KYC and AML have been, and still are, a challenge to crypto markets, partly due to the nature and the origin of these markets and the underlying technology and protocols as alternative approaches to structures in established financial and capital markets. However, for crypto and digital asset markets and their operators to advance in the league of regulated markets, essential prerequisites are to provide market integrity, investor protection, market transparency, market rules and rule enforcement and proper KYC and AML. National, European and global regulations take clear steps in this direction. The future will prove if these can be adequate protecting frameworks.
Where is Eurex's strategy heading in the area of digital assets? Are more advanced instruments such as options on cryptocurrencies conceivable?
We see client demand for options on cryptocurrencies. Bitcoin options, for instance, include a very high volatility risk premium that sophisticated investors seek access to. We also see demand for cash-settled index products. Clients who do not want to, or do not need, access to the underlying prefer cash-settled instruments. We arrange both; options on the Exchange Traded Note that we already use for the futures and another future on a Bitcoin index. However, both products are subject to risk management capacities and regulatory approval.
Randolf Roth is a member of the Executive Board of Eurex Frankfurt AG. In April 2016, Randolf Roth was appointed to the Executive Board of Eurex Frankfurt AG, where he is responsible for equity and index derivatives. He has also been a member of the Executive Board of Eurex Deutschland since July 2016. Until February 2016, Randolf Roth served as CEO of two affiliated companies: Zimory GmbH and Deutsche Börse Cloud Exchange AG. Prior to that, he worked for Eurex in London, Chicago and Frankfurt from 1999 to 2014 in various roles, including Head of Strategy and Head of Market Structure.