Last Friday I said the next couple of issues would be about what an institution needs before it will trade a crypto option in size. The list is short:
- A position it can close with somebody other than the dealer who sold it.
- Margin measured against its whole book instead of one account at a time.
- A record of every fill that a compliance officer will sign.
The place to start is the Options Clearing Corporation, which clears the listed options on BlackRock's iShares Bitcoin Trust. On April 25, open interest in those contracts passed Deribit's for the first time, $27.61 billion against $26.90 billion on Volmex's numbers. The largest book of bitcoin options in the world is novated, margined and guaranteed by the same clearinghouse that has stood behind every listed equity option in this country since 1973.
What 1973 Actually Fixed
Before 1973, options traded over the counter through put and call dealers. Each contract was negotiated on its own terms, and the only way out was back through the dealer who wrote it. Then the CBOE opened in April 1973 with standardized strikes and expirations, and the Options Clearing Corporation was founded that same year. Standard terms made one firm's call look like another's. Novation made it trade like another's, because the OCC becomes the buyer to every seller and the seller to every buyer, so the name on the other side stopped mattering.
When I got to the floor, a little over five years into that arrangement, I never once thought about who was on the other side of a trade I did in the crowd. I did not have to. That is what a clearinghouse buys you.
The Wrapper Is the Limit
So why is anyone still offshore. Because an IBIT option is an option on fund shares. Exercise it and you get shares, not bitcoin. It will not hedge coins in custody, it will not margin against a perpetual, and it trades on US equity hours, which is not when this asset moves. The wrapper is what lets a regulated clearinghouse touch this at all, and it is also the ceiling.
A desk hedging the asset itself goes back to venues that clear their own trades. Each wants collateral in its own account first, and none nets against what you hold elsewhere. A market maker's whole book used to collapse into one number at one clearing firm. Calls, puts, the stock against them, every expiration open: one requirement, measured against what he stood to lose rather than what he held gross. Run that book across three crypto venues and you fund it three times.
None of that is unique to crypto. Margin does not net between the CME and ICE either, and most futures exchanges clear their own trades. What is unusual is how little the neutral option can reach.
The Collateral Is Being Unlocked One Letter at a Time
The CFTC has been working the other half: what a regulated firm may hold as margin at all. On March 20 its staff answered 11 questions on how registrants may use crypto assets. Under staff relief the Commission itself has not codified, futures commission merchants relying on Staff Letter 26-05 can take bitcoin, ether and payment stablecoins as customer margin. The capital charge is 20% on proprietary bitcoin and ether positions, 2% on payment stablecoins. Staff Letter 26-17 followed on May 29, letting one firm post customer crypto with its own foreign broker affiliate. Staff relief binds nobody but the division that wrote it, and it gets granted one applicant at a time.
The ISO Markets Connection
This is the gap I took a job to work on. I am Chief Strategy Officer at ISO Markets, and the design puts a prime broker in the middle: it novates the trade after execution, is meant to margin a client against the whole portfolio rather than per venue, and timestamps every route with the execution logic attached.
I want to be precise, because the words overlap and the difference matters. A prime broker in the middle is not a clearinghouse. It gives a client one credit relationship instead of four. It does not mutualise losses across members, run a funded default fund with assessment rights, or carry the OCC's regulatory capital. It concentrates counterparty risk rather than dissolving it. That is a smaller claim than novation to a central counterparty, and it is the honest one. Whether we get it right is a separate question. I will write about it either way.
What I'm Watching
The cloture vote on September 15. The Senate comes back on September 14 and votes at 2:15 p.m. Eastern the next day. The CLARITY Act needs 60 votes to reach the floor and Republicans hold 53 seats. The open items are ethics language, developer protections and the commodities title. A failed vote would likely end the bill for this year.
What the CFTC writes regardless. Chairman Michael Selig told the agency's Innovation Advisory Committee on August 20 that staff will build a crypto market structure regime under existing authority if CLARITY stalls. One agency writing the commodity half leaves the securities half to the SEC, and a single portfolio ends up under two rulebooks.
Whether the OCC or CME Clearing lists an option on the asset itself. Both already clear crypto exposure, the OCC through IBIT and CME through its bitcoin and ether contracts. A deliverable option on the coin would do more for this market than anything on the Senate calendar.
Bottom Line
The neutral middle in this market is the OCC, and it is winning the part of the business it is allowed to touch. What it cannot do yet is stand behind an option that delivers the asset, held in custody, margined against the rest of a crypto book. Getting there means somebody prices the default risk on an asset that can move forty percent in a quarter, and funds it before the day it is needed. The OCC has done exactly that since 1973. Nobody has done it for this. Next week I will go at who carries that risk, and what happens when the middle itself fails.
Disclosure, not a recommendation: as noted above, I am Chief Strategy Officer at ISO Markets and I founded Liquid Mercury, which builds the technology behind ISO Markets. I have an economic interest in both. Nothing in this issue is investment advice.
All the best,
— Tony
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