Mr. McCourt, CME Group has announced the launch of Euro-denominated Bitcoin and Ether futures on August 29. Why are you expanding your offer beyond Dollar-denominated products at this time?

Demand for CME’s crypto futures from Europe, the Middle East and Africa has increased significantly over the past years, with the region now representing 28% of total Bitcoin and Ether contracts traded. Trading Bitcoin and Ether against the Euro is the second most popular fiat currency transaction.

What are the reasons for the popularity of these trades?

The Bitcoin-Euro and Ether-Euro pairs have their own price formation and their own ecosystem, and there is a tremendous activity in countries outside the Eurozone that still use the Euro as their primary liquidity pool aside from the Dollar. Institutional investors and wholesale product providers are getting more precise about the risk and type of access that they want to provide. That led to an increasing demand for Euro-denominated Bitcoin and Ether futures.

To which extent may these new contracts cannibalize overseas demand for CME’s crypto-Dollar contracts?

Based on the client demand we have seen so far investors largely see these new products as complementary to the existing contracts. We believe that the Euro-denominated futures will allow us to bring in new users that are more Euro-centric in their funding and management strategies. Since these new contracts are based on a reference rate that includes Euro fiat-spot transactions in the crypto market, it should better enable arbitrage trading between the Bitcoin-Dollar and Bitcoin-Euro pairs as well as Ether-Dollar and Ether-Euro. Once the Euro-Dollar exchange rate moves away from parity, we may even see more hedging effects into our FX contracts.

Given that the Euro is trading near historic lows against the Dollar, how will differences regarding monetary policy influence your futures products going forward?

The evolving monetary policy and macroeconomic landscape are changing many investors’ views on crypto currencies. Differences in monetary policy by region or by currency will lead to different crypto strategies and hedging based on portfolio composition. The recent price action of the Euro and Dollar trading at parity reinforces the need for more pure Euro-specific access points for Bitcoin and Ether. Even for individual traders, having these access points removes the friction of having to move into the Dollar first, as moving into Dollar-based crypto derivatives creates additional expenses for non-USD-based investors.

Are your contracts even viable for individual investors given their size?

Even in our regular Bitcoin and Ether Dollar contracts, which include a multiplier by the factor of 5 and 50 respectively, we still have individual participation. Of course, these products are geared towards well-capitalized accounts and sophisticated active individual traders whose participation needs to be in line with regulation in their jurisdiction. But from our perspective, no investor is precluded from trading our regular-sized futures as a function of contract size. We are hoping for healthy individual participation in our Euro-denominated contracts, which will be sized at 5 Bitcoin and 50 Ether as well.

CME has already introduced Dollar-denominated micro crypto futures, which represent 1/10 of one Bitcoin and one Ether respectively. Do you have similar plans for the Euro-based side of the market?

While we currently don’t have any specific plans for Euro-denominated micro futures, we will listen to the market with respect to investors’ demand. I’m optimistic that our new Euro contracts will be successful, but they’ll keep us busy for a few weeks and months to make sure that liquidity takes root. Then, we’ll further evaluate a possible expansion of our product suite.

CME launched options on its Dollar-based micro crypto futures in March and has announced plans to launch options on its Ether contracts on September 12. Will you follow up with options on your Euro-denominated crypto products?

Potentially, options could be interesting as well. Growing options markets across any asset class is usually a little more challenging than growing futures markets, since it requires slightly different technology solutions by liquidity providers. The risk management provisions we have to take also differ from those in linear futures products. However, we need the Euro-denominated futures to establish themselves before we can assess the demand for options. That being said, the price action in crypto has definitely made options more attractive as risk management tools or as an avenue for participants to pick their re-entry point into the market in a more capital-friendly way compared to futures.

For your Euro-denominated futures, do you expect trading activity to concentrate at certain points of the day?

It’s a little early to predict market behavior, but we do see crypto spot transactions in the Euro denomination across the 24 hour trading day. However, trading in the derivatives market may concentrate around European trading hours, with activity increasing when the US and APAC trading hours overlap with the European opening and closing bells. What we do know is that crypto never sleeps, so these contracts can be traded around the clock.

Which other currencies might be interesting as a base for crypto reference rates at CME?

Not every currency pair generates enough independent crypto vs. fiat spot-volume traded on constituent exchanges to create a reference rate. We follow our own criteria when launching new products. That means that the currency pairs have to be supported by at least two constituent exchanges, and then each exchange has to have a meaningful pro-forma contribution to the reference rate.

You also require the reference rate to be crypto vs. fiat...

That‘s correct. In some of the APAC exchanges that have meaningful volume, it may not be in that pure crypto-fiat pair, but in stablecoins or other coins on the platform. We’re continuously reviewing developments in the market and where there are opportunities that meet client demand and meet our standards and methodology for our benchmarks, we’ll look to introduce additional reference rates.

Is the methodology the same for other currencies as it is for the Dollar?

It’s the same overarching methodology, but each reference rate will have its own governance. Our oversight committee might apply small tweaks for each currency. If we moved into an APAC currency, for example, we might change the observation hour. But the criteria by which we include or exclude exchanges or how we calculate transactions to contribute to the reference rate will be the same.

Once your new Euro-denominated products launch, by which standards will you measure their success?

We don’t have specific targets by which we define a product’s success. But most of our crypto product launches have generated large trading volumes out of the gate. So we’re certainly hopeful for the Euro-denominated futures to share the success of their sibling products here at CME. At first, we will focus on the market quality, defined by the liquidity provision on screen as well as in the upstairs market and block liquidity provision in the contract. We will also look at geographic participation. These Euro-denominated futures are global products, so we really want participation from Europe, the US and Asia. In addition, we always focus on trading volumes, open interest and the number of large open interest holders across all our futures launches.

Your product launch comes at a time when crypto markets are still in unrest. How will the fallout from recent stablecoin crashes and bankruptcies by lending platforms, crypto brokers and hedge funds affect trading at CME going forward?

We believe that CME will continue to be a safe haven for individual and institutional investors who want to trade crypto on a regulated platform in a regulated manner. Despite all the negative developments in the broader crypto markets, volumes and open interest at CME are continuing to grow and we’re continuing to roll out new products in the space. Recent market events have reinforced our hypothesis of how crypto should be offered to the market. Our demand is only increasing as institutional investors that we’re attracting are usually following a multi-year focus in their crypto approach.

Blackrock’s partnership with Coinbase has recently sparked hope for a broader return of institutional investors to the market…

That’s an interesting development. I’m a big believer in the inter-relatedness of markets, which is certainly visible between the crypto spot markets, derivatives, ETFs and asset management services. When a major asset manager enters the market, everybody benefits. Certainly, as more asset managers offer spot-based crypto products, there is going to be a greater need for hedging, risk transfers, and that’s what our futures are used for across all asset classes.