LedgerX Gains SEF Approval for Bitcoin Derivatives

The US Commodity Futures Trading Commission (CFTC) granted an order of registration to New York-based LedgerX, giving it full approval to operate a swap execution facility (SEF). LedgerX had been granted temporary registration to operate its SEF on September 10, 2015.

“We are pleased to have received full registration as a SEF from the CFTC for the trading of digital currency derivatives,” says Paul Chou, CEO of LedgerX. “While we were originally granted provisional approval, full registration is an important milestone for LedgerX.”

LedgerX becomes the second SEF to specialize in digital currencies. TeraExchange, which offers trading in bitcoin forwards, was granted registration in May 2016.

Where LedgerX differs is both in its product set and its planned operation of a clearinghouse alongside the SEF. Its application with the CFTC to become a derivatives clearing organization (DCO) is still under review.

The process for obtaining approval has been years-long. LedgerX originally filed its applications both for the SEF and the DCO in September 2014. In December of that year, the CFTC sought public comment on its application and later extended that comment period in 2015.

LedgerX will initially offer fully collateralized, physically settled options on bitcoin, within a fully regulated framework, making it one of the first market infrastructures of its kind within digital currencies. At present, bitcoin, ether and other digital currencies are traded through digital currency exchanges at spot prices, with those exchanges often fulfilling multiple roles that are traditionally segregated in mature asset classes.

As such, digital currencies have been prone to fraud, technical defects and flash crashes in recent years, and some argue that part of the problem stems from exchanges acting as intermediaries, custodians and brokers all in one, as well as the lack of a formal post-trade infrastructure. Few options also exist for hedging, which along with other perceived flaws in market structure has hindered wider engagement with digital currencies by Wall Street.

Chou, a former Goldman Sachs quant, sits on the CFTC’s Technology Advisory Committee. The firm also appointed former CFTC commissioner Mark Wetjen to the board of its holding company, Ledger Holdings, in September 2015.

“We look forward to working with the CFTC on finalizing the DCO registration,” Chou adds.