Financial publication Risk.net reports that each of the three large rating agencies — Standard and Poor’s, Moody’s, and Fitch — have expressed concern over increasing volume in bitcoin futures markets, which are currently available on regulated US exchanges CME and CBOE.
As CCN reported, volume in these markets has grown steadily since their December launch, and combined bitcoin futures trading volume has exceeded $670 million during a single trading session. This increasing volume has helped lend legitimacy to this nascent asset class, but it has rating agencies worried that banks are taking on unnecessary credit risk.
While still too low to be a major concern, rating agencies said that, due to the volatility of the bitcoin price, they may downgrade the creditworthiness of banks who clear bitcoin futures for their clients.
“[The impact on ratings] is something that we think is perhaps not fully appreciated by the market and something that warrants monitoring going forward,” said. Nathan Flanders, global head of non-bank financial institutions at Fitch Ratings. “If the notional materiality increases, that is going to increase our dialogue with the banks.”
“For banks, even though they are saying they are not directly engaging in the trading of cryptocurrencies as clearing members, they have some indirect exposure to it, whether they like it or not.”
Rating agencies assign credit ratings — often letter grades — to banks to gauge the risk that they will default on their debts. Banks whose ratings are downgraded may have a more difficult time obtaining access to funding and may also face higher collateral requirements, limiting the amount of credit they can extend to their clients.
This hostile view toward bitcoin futures is not isolated to Fitch. Ana Arsov, managing director at Moody’s, said that it will consider a bitcoin futures clearing operation a “credit negative” when deciding on a bank’s rating, though this risk is not currently large enough to have a material impact.
“If a bank were to establish a very large business clearing cryptocurrencies, that would be credit negative. As with any asset class, if there is a new concentration of risk that we think is inappropriate, that can create downward ratings pressure. However, we don’t see that risk as imminent.”
Thierry Grunspan, director of global financial institutions ratings at Standard & Poor’s, concurred with those assessments, though he stressed that the risk was “very remote for now.”
“For the clearing members that do trade cryptocurrencies, there is clearly a direct effect,” he said. “If volumes explode, it means some of their hedge fund clients are trading heavily, so it is putting some extra risk on their shoulders. The link is direct.”
But though remote for now, those risks could become more pertinent as more firms release cryptocurrency derivatives products.
CBOE has not been shy about its desire to create more cryptocurrency products, and CME has taken what many believe are the first steps toward launching an ethereum futures market. The Nasdaq, meanwhile, is reportedly developing its own bitcoin futures product and has expressed openness to launching a cryptocurrency exchange.
Moreover, a number of fund providers hope to soon be able to list the first bitcoin ETF, a development that would provide a greater number of retail buyers with exposure to bitcoin futures.
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