Evgeny Gaevoy, chief executive of market maker Wintermute Group, said digital asset market participants are seeking to diversify counterparty risk due to concerns about regulatory pressure on some platforms, which has helped boost a 19-fold rise in contract for difference (CFD) volumes in its digital asset derivatives trading arm.

CFDs allow investors to express a view on crypto without buying the underlying currency on an exchange, as the derivative references the difference between the opening and closing price of a contract. Wintermute has established a risk-based margin for each CFD instrument individually based on the observed historical volatility of the underlying asset (without correlation-based off-sets).

Wintermute Asia said in a statement that crypto CFD trading volume has risen 19-fold in the six months between March and August this year, following the product’s introduction in February. The firm continued that the product was launched to meet institutional requirements and provide an efficient gateway to digital asset markets through a familiar instrument, which eliminates the need for crypto infrastructure, such as a wallet.

Gaevoy said in an email that the rise in Wintermute’s crypto CFD volumes can largely be attributed to organic growth within the market. He believes that crypto derivatives are in the early stages of growth, but that adoption and market expansion will surpass anything seen in traditional finance.

“We are seeing a trend of many of those trading perpetual futures on crypto exchanges increasingly looking to diversify counterparty risk due to concerns about regulatory pressure on some platforms,” he added. “At the same time, counterparties trading CFDs with non-exchange liquidity providers have consistently mentioned issues such as weekend liquidity, downtime, high fees, limited token coverage, and wider spreads.”

He continued that counterparties have also shown interest in more flexible funding schedules and appreciate the ability to tailor funding models to their needs. Institutions can adopt either a traditional daily funding model or continue with the crypto standard of funding every eight hours, including weekends.

The market maker has also made CFDs available for trading on Wintermute NODE, the firm’s electronic over-the-counter trading platform, alongside trading via API or chat. The NODE update also enables the use of virtually any fiat or crypto asset as collateral for margin in derivatives trading on the platform. Capital efficiency is becoming more of a focus in crypto as more institutions enter the market.

“Institutions are also prioritizing the safety of their capital,” Gaevoy added. ”Holding large amounts on exchanges is often viewed as risky, and this is where our strong balance sheet and support for third-party custodians provide the reassurance needed to safeguard their assets.”

Counterparties are posting a balanced mix of both fiat and crypto as margin according to Gaevoy. Crypto stands out during off-hours, such as weekends, thanks to its 24/7 transferability and Wintermute has also seen some counterparties using liquid staking tokens as collateral, which Gaevoy said ties back to the emphasis on capital efficiency.

Collateral

Traditional asset managers such as BlackRock, Franklin Templeton and January Henderson have introduced tokenized money market funds. Gaevoy said tokenized real-world assets, particularly yield-bearing ones like tokenized money market funds, are increasingly being used as collateral.

“However, this development primarily targets institutions that already hold money market funds or fiat for margin purposes“ he added. “As mentioned earlier, many counterparties, especially those more crypto-native, tend to use crypto assets as collateral.

He believes that traditional financial firms are still quite far away from accepting digital assets as collateral due to their regulatory capital requirements, which make it uneconomic and impractical for them to accept and hold digital assets on their balance sheets.

“Additionally, there isn’t much incentive for institutions to use digital assets as collateral unless financial firms start offering leverage beyond pure custody services,” he added. “Traditional financial institutions also operate within strict internal risk frameworks, which tend to evolve slowly unless driven by regulatory changes.”

GMCI index trading

In addition to updating its CFD capability, Wintermute has expanded its OTC derivatives offering with the introduction of GMCI index trading as an instrument for CFDs. Wintermute said it is the first OTC desk to provide this capability.

Wintermute chose the GMCI index suite because it is based on a carefully curated selection of digital assets, and construction takes the liquidity of the underlying tokens into account which ensures the indices are well-suited for active traders. The GMCI methodology is also transparent, rules-based and  provides clear guidelines for when and why tokens are included or excluded from an index according to Gaevoy.

“They rebalance their index on a monthly basis, ensuring optimal results for investors by favoring tokens that perform well and removing underperforming ones more quickly,” he added. “Additionally, GMCI follows the EU Benchmark Regulation and is in the process of applying for EU BMR registration.”