Goldman Sachs is Creating Conditions to Control Risks on Futures Contracts

Goldman Sachs is creating certain conditions to process certain bitcoin futures-related transactions and is looking for ways to reduce their risk. The company has requested a few of their clients allocate funds to their account to be in line with the value of the bitcoin futures trades.

Due to what was perceived as a surprising demand, said clients felt discouraged from conducting business with the bank. Instead of seeking to clear trades through it, they looked into other avenues.

The guidelines are inclusive of other margin requirements.

Such requirements include the 47 percent that would be demanded by CME Group when it begins trading Bitcoin futures next week and the 44 percent requirement of Options Clearing Corp in order to clear contracts traded on the CBOE.

However, it’s not uncommon for a brokerage to impose higher requirements than the exchange itself.

Understanding Margin Requirements

A margin requirement refers to how much investors need to set aside first so that other parties in the trade know that any losses can be covered.

It should be noted that the margin requirements for Bitcoin futures are significantly higher as compared to commodities such as oil and gold due to the inherent riskiness of that specific asset class.

Responses from Other Institutions

The group, Interactive Brokers, which handled 53 percent of the first day’s trading in CBOE’s Bitcoin futures, mentioned that it will require a margin of 50 percent for long investments, conveyed Kalen Holliday, Interactive’s spokeswoman. That number may seem rather extreme, but each firm has its own level of risk that they are willing to take on.

It was further explained by Interactive Brokers that it would require around 240 percent for short selling, based on current rates.

Options Clearing and CME also increased their margin requirements, citing significant price swings in the market, reports suggest.

Coming back to Goldman Sachs, Tiffany Galvin, a spokeswoman for the group, stated that “Margin decisions are based on multiple factors and vary on a case-by-case basis.”

Earlier this week, CBOE began offering futures contracts, and Goldman Sachs is one of the few institutions that have cleared the trades since then.

It isn’t Unexpected

Last week, before Bitcoin futures began trading, financial institutions had expressed their concerns about the trading margins that were set forth by the exchanges.

The Futures Industry Association, in a letter issued to regulators at the time, had stated that the trade group of banks and brokers do not believe cryptocurrency trading risks have been assessed properly.

Many within the Futures Industry Association are seeking to make sure that there is spillover risk into other markets. They are also making certain that there are stringent measures when dealing with buyers and sellers of bitcoin futures in levels of margin and clearing.

The exchanges are watching to address concerns and have conducted their due diligence prior to launching them.

What’s the way forward?

While it doesn’t seem like there’s going to be anything in the near future that could cause these institutions to roll back to normal margin rates, it remains to be seen if any kind of developments pertaining to Bitcoin could be used as an influential factor, no matter how insignificant it seems.

With it, it also provides a notable lesson to the community to be prepared for added demands, steeper rates, and further requirements whenever they are trading in Bitcoin in a new capacity. The stigma with the currency still exists, and the wild swings that it has been taking in terms of rates lately isn’t adding much to its stability.

By | 2017-12-19T03:58:30+00:00 December 18th, 2017|Cryptocurrency News|0 Comments

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