Scaling regulated crypto-asset derivatives trading in Europe

With the Markets in Crypto-Assets Regulation (MiCAR) coming into full force in December 2024, there is a question on how recent regulations affect the market structure of crypto derivatives and crypto-assets more widely. Together with the Markets in Financial Instruments Directive (MiFID II), MiCAR is set to revolutionise the crypto derivatives market in the EU by providing clarity around how crypto-assets are treated from both a retail and institutional investor perspective.

How MiCAR and MiFID II create the fundamentals for market growth 

At the core of the emerging crypto derivatives market is MiFID II's introduction of Organised Trading Facilities (OTFs). OTFs were created as a way to regulate broker networks that had grown large and multilateral in nature, often bypassing the standards applied to traditional trading venues. MiFID II expanded these networks into formalised trading platforms, increasing transparency and accountability in the process of matching buyers and sellers. Keeping the element of brokerage intact, with the OTF category MiFID II has created a multilateral system whereby intermediaries can interpose themselves between buyers and sellers without taking a proprietary position, matching buyers and sellers throughout the transaction but abstracting away from the counterparty identities. In this structure, the broker is never exposed to the risks of holding an actual position but acts as an intermediary that ensures the trade is completed seamlessly.  

Among the tradeable products within this trading venue are derivatives. However, while giving examples of contracts that can qualify as derivatives, MiFID II does not provide a single, straightforward definition of what derivatives as financial instruments are. For this reason, the introduction of MiCAR is a unique opportunity for the crypto-asset derivative market to scale. MiCAR standardises crypto-assets to ensure that they are traded and treated similarly to traditional financial instruments, meaning that they can also be used as underlying instruments for derivatives contracts, as confirmed by the European Securities and Markets Authorities (ESMA). This regulatory clarity is critical because it formally integrates crypto-assets into the broader financial system, allowing for the creation and settlement of derivative contracts based on these assets within regulated markets and to use these assets as collateral. 

The creation of OTFs through MiFID II, together with the clarity provided by MiCAR on the role of crypto-assets in the derivatives market, provides an opportunity to scale this market where previously regulatory clarity did not exist and where legacy market structures are not able to accommodate product innovation. The OTF framework has the flexibility to work without external clearing, and supports the trading of perpetual contracts. By interposing the intermediary, it facilitates transactions with multiple exchanges without set termination dates while the broker manages the matching of buyers and sellers without taking a directional market position. 

By establishing crypto-assets as underlying for MiFID derivatives, MiCAR ensures that platforms like One Trading can offer perpetual contracts on such assets on-shore in a fully compliant and regulated platform. The combined regulatory oversight of MiCAR and MiFID II has created a robust and transparent market structure for derivatives contracts on crypto-assets and results in the on-shoring of trading in the underlying. This has allowed One Trading to safely integrate spot and futures trading, offering minute-by-minute settlement of crypto derivatives underpinned by real-time collateral management in spot assets. As a result, One Trading can manage perpetual contracts in a way that drastically reduces counterparty exposure. 

Can clearinghouses adapt to the change? 

Clearinghouses have traditionally been central to managing the risk of derivatives trading, ensuring that trades are settled, and counterparty risks are mitigated. However, their operational limitations are becoming more evident in the face of new technologies and the real-time nature of crypto-asset trading. 

Through the latest technical innovation and regulatory support, the market is now poised to provide alternative arrangements to clearing that solve for clearinghouses’ inefficiencies, especially in the context of perpetual futures. Traditional clearinghouses operate on a delayed settlement cycle—up toT+2— and mark derivatives positions to market only once a day. This means that positions are repriced, and collateral is effectively provided, long after counterparty exposure has occurred. This delay creates negative incentives for traders, e.g. where those in risky positions wait for favourable market movements before their default is recognised by the clearinghouse. Moreover, because clearinghouses work on an after-the-fact basis (they are not exchanges providing markets real-time), they hold onto collateral that they are not continuously selling. This exacerbates risk in the system, which is borne by market participants in the form of higher margin requirements, clearing fees and mutualisation of losses.  

Perpetual futures require market infrastructure to operate continuously, with positions and collateral revalued in real-time. Traditional clearinghouses are ill-equipped to handle the dynamic nature of these instruments, as they cannot liquidate defaulting positions instantaneously or adjust collateral requirements as market conditions fluctuate. Alternatively, platforms like One Trading with purpose-built technology are in a prime position to leverage the regulatory opportunities facilitated by MiCAR and MiFID II to provide more efficient products and structures that can challenge the monopoly of clearinghouses in the derivatives trading market.  

Rather than letting profits/losses accumulate on derivatives positions, One Trading’s technology enables real-time settlement of any and all derivatives positions between fully-segregated client accounts at a tick level of under a minute based on real-time market data. If a trader is at risk of default, (part of) their position is liquidated immediately, and a new participant steps in at the current market price. As this happens dynamically and upon every tick, it avoids disruption to the market or risk of cascading defaults. Additionally, unlike clearinghouses, One Trading’s model isolates risk by matching participants in real-time and dynamically exchanging counterparties. This minimises  the need for large collateral pools and reduces the amount of collateral needed to be posted. This structure ensures that counterparty risk is effectively managed, and positions are closed in a timely manner without exposing the rest of the market to systemic failures.  

Through the use of real-time settlement and dynamic risk management, One Trading is able to provide a more economically efficient way to clear and settle derivative transactions. Market participants no longer need to tie up large amounts of capital in collateral pools held by clearinghouses, reducing the cost of participation and increasing liquidity in the market. This competitive dynamic is likely to drive innovation in both crypto and traditional derivatives markets, as platforms compete to offer the most efficient trading and post-trade solutions. Leveraging the flexibility of MiFID II’s OTF structure, One Trading is set to revolutionise the trading of crypto derivatives in a regulated environment. 
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The market is ready  

MiCAR and MiFID II have together shaped the market structure for crypto derivatives, providing the regulatory frameworks necessary for the safe, quick and transparent trading of crypto derivatives. This has allowed One Trading to leverage these regulatory advancements to offer real-time settlement of all the payouts between all positions on their platforms among segregated client accounts. By increasing settlement frequency and minimising counterparty risk, One Trading is in the position to lead a more efficient, transparent, and competitive space. The combined regulatory structure of MiCAR and MiFID II offers an opportunity for the market to drive the growth of crypto derivatives and perpetual futures across Europe.

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