The Institutional Horizon of Digital Assets - TOKEN2049 Singapore 2024

thanks everyone for being here um as mentioned John lagman uh from Bloomberg now obviously Bloomberg and CME Group have had a long collaborative history uh for those of you who may not be so versed in a lot of their products especially crypto and you know overall trading products and trafi uh you know Tim you know maybe I hand it over to you to maybe give a more lengthy uh I guess intro about yourself and even more importantly SEI group great thanks John uh so as they said Tim mccort uh with the SEI group and we're one of the world's uh leading derivatives exchanges uh we have Futures and options on Futures and swaps in all major asset classes uh trading as a US regulated Futures exchange uh we've been in the crypto space uh for about seven years from a tradeable product side about 9 years uh all in uh really happy to be here at token 2049 uh and I have to say certainly a first following two Stellar F1 drivers uh haven't quite seen an exodus out of this room you know but you know we'll do our best John and I here you know yeah we we'll give it a go you know so you know prior to uh you know this I obviously was going to do a little bit of research I was actually T telling Tim ironically back in 2010 we actually worked together so prior to Bloomberg I was actually an fx options Trader for a long time so we worked at uh what was then or still is the actually no they changed their name back to that West they're the Royal Bank of Scotland so uh in addition what I also found out that I did not know and I apologize I should uh you know C group actually has been active in crypto for about a decade yeah and stuff so you know um given that you've been through a few cycles and and whatnot I mean you know any kind of I guess commentary or view or insights on kind of how the markets kind of evolved uh and whatnot yeah yeah it's certainly been an interesting ride for ourselves at C group as well as the market and our clients uh we our foray into the crypto space was the Advent with our partner CF bench marks around the Bitcoin reference rate which is the underlying to our financially settled Bitcoin Futures at C group and it was really about building the market this is something that SEI does well as an almost 200y old institution uh we've built some some other markets for for risk management and Innovative products and and the markets really come a long way I think back to seven years ago a lot of the questions seem group getting at the time was why are we in this right and I still kind of say I'm not sure why trafi has become sort of an insult um but it is something that we're responsible for you know as a regulated venue offering regulated products we were playing a bit of the long game right which I think has served us well over the last seven years where we could be a little bit more patient we held ourselves to a higher standard the market and our clients held us to a higher standard and now here we are today the the institutional adoption and the retail participation in our markets has continued to accelerate uh we're record levels of trading and open interest here in the back half of 2024 uh it's been a very fun ride the teams really enjoyed it but I think the ability to introduce products to the market that help with access or Bonafide risk management to something is still relatively new uh as crypto currency and Bitcoin and ether in the the global Capital markets has been something that that the clients in the marketplace has really appreciated great so you know you've talked a little bit about the evolution obviously this uh this Fireside on the institutional Horizon of digital assets so you know maybe if you could touch upon you know institutional participation uh now if you want to talk about it in say overall terms or you know you guys obviously uh handle many different segments of the institutional Market you know so either way if you want to break it down to certain player types or just uh institutional participation as yeah for sure John so it's interesting is if you'd asked me that question I don't know maybe two or three years ago I would have said something more along the line of that we do have institutional type flows but not necessarily your traditional institutions with the Advent of crypto hedge funds crypto asset managers crypto trading firms these are all people familiar familiar with traditional markets that had sort of migrated to crypto and we were seeing the personality of Institutions but the last several years we've seen institutional adoption continue to accelerate with asset managers real money accounts hedge funds Banks active individuals and now certainly with the Advent of the ETF in the space in the US that's been a huge kind of upwelling of interest in terms of how people can access the market and a lot of that flow comes back to CME when we look at our futures product as the leading Futures exchange for Bitcoin in terms of open interest there's a lot of gravity around the risk management and the price Discovery process that happens at C group and that's really seen as now the Market's becoming more and more interrelated for institutions uh and I think the one thing to note that I think is interesting is if you think about the crypto markets it's probably the one exception where if you look at traditional asset classes and traditional markets they really started at the wholesaler level and then at some point they figured out how to get it to the individual crypto's kind of the reverse it was really driven by the active individual trading Community those people who wanted to access these exciting markets wanted to manage their risk and now the wholesale Community is sort of finally catching up more than a decade later so it's a pretty interesting phenomena yeah very another interesting phenomenon especially if you look at maybe end of last year when we started having to move higher and say Bitcoin for example was basically crypto-based uh uh ETFs and stuff so you know I be curious to see was there any uh kind of insights you saw on how it might have impacted the driven markets that CME is uh you know obviously a part of um you know what's been the kind of impact or how you guys have seen the ETF business flow into your business yeah it's a great question and my background is before joining CI I'm an equity index Trader sort of at my core uh and I think there's like I described the equity Market there's a very strong interrelatedness or there's a high degree of symbiotic relationship between the ETF market and the Futures market and certainly the Bitcoin ETFs are no exception to that uh we've had the futures-based ETF that pro shares pioneered with seei futures for for several years the spot ETFs came back online uh in January with Bitcoin and eth thereafter but the Futures are a great tool for that and a lot of times folks think it's an either or choice but it's not the these instruments go hand in glove and what I mean with that if you're a trading firm you could deploy sort of very traditional strategies of you know long ETF short future or vice versa to try and extrapolate some of the Arbitrage that might be there or the carry of the product but also what's interesting is the Futures are a critical part because the spot-based ETFs are pretty new and I say this as a former Equity Trader it's not the necessarily the most efficient creation Redemption process creating these new ETFs can be a bit cumbersome there's a fair amount of price slippage uh in terms of handing over the cash and then getting the the ETF on on the next trading day but with Futures and some of the mechanisms that we have whether it's the basis trade against the close or trading at the the market close in the Futures Contract people are using Futures as almost a synthetic way to create and redeem ETFs which is increasing velocity and it's not surprising that as you saw that assets under management or the AUM of the ETF rise with the introduction we've also saw a pretty strong upwelling of Futures because the whole ecosystem is growing uh and I think that the fact that we have a strong relationship between Futures ETF OTC and spot trading that's going to be a great development for the market for many years to come uh you know uh we kind of focus uh on bitcoin any kind of observations that's interesting a lot of people I talk to traditional Finance types I mean obviously I I I I work with both crypto and FX and everyone's kind of had this kind of face level or a very initial level view that the uh e ETF really didn't didn't you know maybe in comparison to how Bitcoin kind of shot up you know from your own kind of analysis you know maybe link back to the Futures that are that are trading against e is there any kind of things that you might have seen that maybe either reinforces this or says something opposite yeah that's a great question I think well I think certainly you know the eth ETF had the the I don't know maybe unfortunate of going second right so the recency bias of how successful both the Futures based and spot-based Bitcoin ETFs were certainly it hard on a comparative basis but you know the the eth ETFs are doing pretty well in the grand scheme of things of ETF launches but I think John what's what's the underpinning of your question that I think about and is something that we've also seen in our Market whether it's across the standard siiz Bitcoin in E futures or the more uh individually size micro Bitcoin and micro ether contracts is the market participants for some reason and maybe this is an extension of the personality of the digital assets themselves Bitcoin is a little bit more of a Buy and Hold people are sort of allocating or investing or hedging their digital asset portfolio with Futures at SEI group but eth has always been the one that people really like to trade uh I think it has a slightly different personality a little bit more velocity to that market and I think that's what we're seeing play out in the ETF because people are measuring sort of the ETF success by AUM growth but I think eth ETF is displaying some of that same characteristic where it's a it's people are trading it but they're not necessarily holding it for the longterm it might be an intraday expression of risk or they just sort of like having it in their account and trading it but they're still running more of the longer term strategies with Bitcoin which tends to to help bolster AUM or open interest on the future side so I think we're seeing similar uh behaviors uh but certainly both as some of the the most popular uh crypto or the digital assets out there they have their own place and and a few months in the grand scheme of thing of an ETF it's still very early days cool so you know I know in addition to maybe people trading liquid markets and crypto uh we probably have people that are say business development maybe product managers you know as as as someone who has to go through that whole process of of thinking of an idea of a new product uh trying to figure out you know why or even when or or who are we targeting and then you know really all even deciding you know again that when should we launch it you know could you kind of like maybe give us some kind of background as to maybe what you can tell us uh your whole kind of process maybe from from start to finish and finish just being even a new start to something else right yeah no for sure so I think one thing to keep in mind at semi group is the the main driver of innovation and product development at semi group is customer demand those customers that are clearly articulating a demand or a risk management function is a great source of inspiration and that was the original Genesis for Bitcoin when we started looking at the reference rate development back in 2015 and that demand for example was they wanted a clear articulation of what is the for certain price of Bitcoin in US dollar terms once a today so that's why we worked to develop the index with crypto facilities now CF benchmarks and we have the constituent exchanges contributing their prices because it's important that the Futures Market or the derivatives Market has to converge with the underlying asset so the last Friday of the month when the Futures expire they're settling into the the Bitcoin reference rate and it's actually where that is the prevailing spot Market is trading at the time so we had to lay a lot of the groundwork sometimes for products and Bitcoin is no exception we had to invest into developing the index we had it out there for for a year before we wrapped it around the future uh and now it's more of trying to work with folks to understand what's next how should we be thinking about additional products where we introduce the micro siiz contracts the basis contract we have um options on bitcoin and ether both standard and microsize we're we're soon to launch one of my my favorite name products the Bitcoin Friday future which is also known as the BFF so that's something we're having a little bit of fun with for your new BFF is the the Bitcoin Friday future at CME and but it's really about for us being that regulated venue offering regulated products and a transparent efficient manner is that it has to be regulated so as a US exchange we are only introducing products where we also have that regulatory Clarity and certainty and at present we have that only on bitcoin and eth uh that's something where we're cftc regulated exchange uh so that is also a bit of a a governor on our product development specifically for crypto but asset classes we can only bring those productss to Market that comport with the US regulation okay now I I know I I need to be cognizant at time B it was actually something interesting you said that I was having a discussion with someone uh last night uh in between a very long night by the way but uh what I can remember it was actually something very key so he he was telling like you know I wonder if this is kind of how you approach it he said the key with products is sometimes what people forget is they have the solution but there's no actual problem that they're solving do you actually try to even because I it sound like you go to the your clients you find some kind of Gap that they have you know and obviously probably make sure how many clients that you know which is something we do at Bloomberg figuring out you know how big a gap that is because you can't just make something for one person so to speak I mean there very extensive is that something where I guess the your sales groups your account managers you rely heavily especially you not being in Asia yeah absolutely it's something where I think I agree with your point A lot of times in the prodct development you see firms or institutions or other exchanges and platforms they're sort of a hammer looking for a nail right and they're trying to design what they may think is maybe academically curious or interesting uh which could be true but if no one's going to trade it or if no one's going to use it there could be a fatal flaw of that product which will sort of make it almost Dead on Arrival so that's why for us in trying to deliver products in response that clearly articulated customer demand is extensive validation across the Spectrum we're talking to our Market making firms uh end clients asset managers hedge funds our retail broker Partners uh those uh participants in the market that say hey will you use this it's such an easy and obvious question but you'd be surprised how many people don't ask it and it's if you wouldn't use it what should we do such that you could use it and sort of iterating on that product design and making sure that we really deliver something that is the most appealing to most of the market because that's what Mar make markets trade you need multiple personas in the market that almost vehemently disagree over what tick is going to happen next if everyone liked one product and only served one feature or one segment you'd have a lopsided one-sided market and everyone would be staring into sort of the Abyss yeah uh waiting for the other side to show up but if you can design it in a way that incorporates most of those personalities or those personas of the market you'll get people vehemently disagreeing which is great for the efficient risk transfer process right so uh one thing I I was uh you mentioned I you know very I guess key maybe for the next thing I want to talk about uh obviously you have like 50 reference rates uh the BFF the uh the is the latest thing coming out to Friday's uh Friday Futures uh anything else you have on the horizon you know uh one thing I remember I was kind of joking with you zero day xree options or or anything you know that you can also kind of mention that you know may come out maybe it won't uh you know that's yeah yeah that's a great question so certainly uh Bitcoin Friday future the BFF is getting a lot of our attention that's something that we're working very closely with a lot of our Retail Partners uh all of you should check it out if you haven't already uh and the fact that it's just sort of that Weekly Friday end of week close it really uh doesn't have some of the same basis exposure that you would even with a month-long future so it'll track spot a little bit better we do have options it see me that are expiring every day of the week Sunday or you know Monday through Friday that is still a constraint that we have we don't have weekend trading yet uh we're still kind of working in the Bitcoin and Ether Lane we're working and looking at things of should we introd physically settled contracts could we introduce additional order types or even additional reference rates that may comport kind of John to your question of what is sort of the apack close versus London versus New York and try just to make sure we're continuing to develop a global offering uh and that's where all the client feedback is great uh if any of you guys have ideas or things that we should be working on we're all years uh but it's really just sort of focusing on on those sort of those in incremental uh order types and something as exciting as the BFF yeah and and if you need to to find out uh if you're very new to what C does and you want to be able to see what they do very big uh I guess uh uh how do you say suggestion get a Bloomberg terminal okay see R YP go and you'll see kind of see me so sorry uh I'm not trying to Shield I'm just you know just giving friendly advice uh not companywide advice now luckily we still have a couple minutes any other uh last items that you want to talk about whether it's like uh not necessarily just uh C related uh say product rollouts or any other things you see on the horizon other people are doing that you know that kind of interest you yeah I think it's it continues to be an amazing space when you know being in an event such as this at token 249 seeing a lot of the Innovation uh we're constantly looking to get additional constituent exchanges to to be part of the Bitcoin reference rate we're really committed to trying to make sure that we are focusing on a really wide swath of of that ecosystem but still remaining it's important to us that it's crypto versus Fiat transactions that we're looking at for the Bitcoin reference rate and it's something when we look out across the Horizon to me you know the conversations have changed with clients I think over the last few the last few months the last few years and it's gone from sort of why is C doing crypto to well okay it seems to be going but is it for me to now like how do I actually make this part of my portfolio how much should I be allocating as a function of risk how do I extract some of that financing rate that's embedded in the future versus the ETF so the fact that we're seeing more complex or maybe even more traditional strategies and questions coming from our clients I'm very optimistic about what the future has not only for risk management at CME Group but certainly the the industry as a whole it's an exciting time it's hard to believe it's been seven years since we launched our first future uh and I'm very very optimistic and look forward to what the next seven and longer uh has in store for us at CME Group okay well you know great um yeah thanks uh for having the chat actually you know one thing I was thinking right then do you actually get that kind of question sometimes I get from clients what are the other guys doing you know like have they adopted yet you know and things like that but you know you don't have to answer with that but again thanks everyone for uh taking the time to uh you know hear uh Tim and myself speak um yeah