Mar 28, 2023
CME Bitcoin Event Contracts: simplified access to the BRR Liquidity Complex
Bitcoin Event Contracts offer the simplest way to access Bitcoin exposure at its most liquid and institutionally trusted price – the regulated CME CF Bitcoin Reference Rate
The CME’s recently-launched Event Contracts on Bitcoin Futures are the latest enhancement of its suite of regulated crypto contracts, enabling improved flexibility of access to and management of Bitcoin exposure.
Like all CME Bitcoin products, CME Event contracts on Bitcoin Futures settle to CF Benchmarks’ regulated CME CF Bitcoin Reference Rate (BRR) , assuring the highest possible reliability, accuracy and resistance to manipulation.
Still, the difference between Bitcoin Event Contracts and other CME Bitcoin products, is their uniquely ‘retail' interface to institutionally trusted Bitcoin exposure.
So, we think it’s instructive to outline their key features.
What are they?
In essence, they are daily expiring, limited-risk, cash-settled, ‘European-style’ options on Bitcoin futures, designed to cater to short-term trading opportunities, with contract values that are lower than other CME Bitcoin derivatives, all of which settle to the BRR.
What are they for?
Event Contracts on Bitcoin Futures are designed to provide straightforward, short-term exposure to Bitcoin.
Meanwhile, the remainder of the CME’s BRR-powered BTC contracts and other products—futures, Micro Bitcoin Futures, Trading at Settlement and Basis Trade on Index Close—cover most professional and institutional exposure and risk offsetting requirements at scale.
This means Bitcoin Event Contracts will generally serve as an avenue for regulated institutions to offer regulated Bitcoin exposure to individuals.
As we’ve often explained, the complex consists of participants and counterparties transacting billions of dollars’ worth of bitcoin and bitcoin products, thereby contributing to, and/or directly referencing the BRR and/or its real time variant the CME CF Bitcoin Real-Time Index.
The complex provides additional assurance that all CME Bitcoin products, including Event Contracts, are underpinned by the most, reliable, efficient and trustworthy Bitcoin market possible.
Bitcoin Event Contract Essentials
- Each contract is valued at $20 and has a fixed pay-out
- In contrast to traditional options on futures, Bitcoin Event Contracts settle with reference to a daily settlement price of BRR
- Event Contracts do not exercise into underlying futures positions
- If an Event Contract expires “in the money”, the short position holder pays the long position holder $20
- Event Contracts have ‘premium style’ margining: this means a long position in an Event Contract will pay the full premium for each contract
- As such, the maximum risk on a long position is known upfront
- Due to the fixed pay-out feature, the maximum per-contract risk for a short position is $20, minus the premium received for selling the option
The above essential points shouldn’t obscure just how simple Event Contracts are.
Fortunately, this simplicity is easily illustrated:
Premises behind ‘Regular’ BTC options:
Let’s consider a regular CME BTC Futures call option for this:
- If the price of CME Bitcoin Futures is above the strike price at expiry, I can exercise the option to receive the settlement value of the bitcoins equating to the contract(s) purchased
- Alternatively, if the option is in-the-money at any time before expiry, I can sell the option for a profit
(Remember, CME Bitcoin Futures are cash-settled - no bitcoin is ever delivered.)
It’s easy to imagine similar statement for short CME BTC calls, and long/short CME BTC puts.
Bitcoin Event Contract premises:
By contrast, a CME Event Contract can be expressed as a simple ‘Yes/No’ choice:
The ‘Yes’ Contract can define the expectation of an affirmative answer to a question like this:
- ‘Will the daily settlement price for the Event Contract on Bitcoin Futures be above [X]?
Likewise, the ‘No’ contract can define the expectation of a negative answer to a question such as this:
- ‘Will the daily settlement price for the specified futures contract be at or below X?’
The outcome of the event determines whether the trade results in a profit or loss.
As this banner from the CME’s Event Contract page shows, premises behind a BTC Event Contract trade could scarcely be clearer.
Simpler options, same high standards
Still, it is important to understand that whilst ‘packaged’ in a simplified way, event contracts are still fully fledged options:
- A ‘Yes’ Event Contract trade is equivalent to a fixed pay-out call option on the futures contract’s daily settlement price
- A ‘No’ trade is equivalent to a fixed pay-out put option on the futures contract's daily settlement price
This has a number of implications.
- Risk and leverage
Although, contracts are not leveraged in the typical sense, short positions are ‘margined’—i.e., leveraged—though this leverage is short-duration due to the same-day term
- A short position, closing out of the money, incurs final settlement obligations that the clearing member must pay at next settlement cycle
- But the fixed payment structure still applies: the risk for a one short position is $20 minus the premium
- Position limits
Just like other CME contracts, event contracts are subject to Position Limits and Accountability rules
- Currently, each event contract product has its own Single-Month Accountability Level of 12,500 event contracts, equal to a notional value of $250,000, which will be reset daily
In other words, the CME has eliminated the risk that an entity could exert undue influence on the bitcoin market using Event Contracts, in the same way that such risks have been eliminated for other CME Bitcoin products.
Meanwhile, with Bitcoin Event Contacts powered by the BRR’s proven reliability, accuracy and manipulation resistance, it should be clear their simplicity implies no short cuts in market integrity and governance.
- Learn more about how the CME CF Bitcoin Reference Rate (BRR) secures Bitcoin Event Contracts on the CME's Event Contracts Resource page
- Complete Bitcoin Event Contract specifications
- CME Group’s initial event contracts filing includes comprehensive terms and principles of governance: