New CME Bitcoin Futures And The Goldman Sachs Connection

Embedded into Bincoin’s genesis block by Satoshi Nakamoto on January 3, 2009, the day Bitcoin went live, was a message which is now well-known throughout the Bitcoin community. This message, taken from The Times newspaper of that day, read “Chancellor on brink of second bailout for banks”.

While there is ongoing debate as to its significance, the message was arguably a commentary on Satoshi’s less than favorable regard for the parasitic, unstable and inflationary nature of the contemporary banking system, as well as a statement on Bitcoin being able to provide a more equitable transfer system by cutting financial institutions out of the equation.

Elsewhere, Satoshi had elaborated on banks, again is a less than flattering way:

“Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”

We can therefore conclude that the Bitcoin creator does not have a high opinion of banks in general, which probably also explains why Satoshi created Bitcoin in the first place, and why Satoshi’s white paper about Bitcoin was first published on a cypherpunks mailing list, and not, for example, within the pages of a Bank for International Settlements (BIS) research report.

Which is why it would be intriguing at this time to know what Satoshi thinks of the imminent launch of (US dollar cash-settled) Bitcoin futures by the CME Group. But even more interestingly, it would be intriguing to know what Satoshi would think of the fact that the settlement prices of these new CME Bitcoin futures are based on calculations by a private London-based company whose founder and sole director is from Goldman Sachs.

As a reminder, this is the same Goldman Sachs which Matt Taibbi described as follows, coincidentally also in 2009:

"The first thing you need to know about Goldman Sachs is that it"s everywhere. The world"s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."  

This is also the same Goldman Sachs, whose alumni currently occupy positions in the most powerful financial positions in the world, positions such as US Secretary of the Treasury (Steven Mnuchin), President of the European Central Bank (Mario Draghi), Governor of the Bank of England (Mark Carney), and President of the Federal Reserve Bank of New York (Bill Dudley).

The Fix is In: CME Bitcoin Futures

One key feature that stands out when glancing at the contract specs of these soon to be launched CME Bitcoin futures contracts is that they will be cash-settled based on a “CME CF Bitcoin Reference Rate (BRR)”

A recent CME press release elaborates:

“CME Group"s Bitcoin futures will be cash-settled, based on the CME CF Bitcoin Reference Rate (BRR) which serves as a once-a-day reference rate of the U.S. dollar price of bitcoin.  

 

Since November 2016, CME Group and Crypto Facilities Ltd. have calculated and published the BRR, which aggregates the trade flow of major bitcoin spot exchanges during a calculation window into the U.S. Dollar price of one bitcoin as of 4:00 p.m. London time.

 

The BRR is designed around the IOSCO Principles for Financial Benchmarks.

 

Bitstamp, GDAX, itBit and Kraken are the constituent exchanges that currently contribute the pricing data for calculating the BRR.”

A reference rate / benchmark calculated in the City of London that is used as a basis for the settlement of multi-billion dollar financial contracts. Wait, where have we heard that before?

The CME web site also helpfully hosts a methodology document for this Bitcoin Reference Rate (BRR), but which strangely has very little mention of CME, and a lot of citations to Crypto Facilities Ltd.

The document is even titled "Crypto Facilities - Digital Assets Unleashed" (dated March 6, 2017) and also copyrighted by Crypto Facilities Ltd. “© 2015 - 2017 CRYPTO FACILITIES LTD. ALL RIGHTS RESERVED. PATENT PENDING.”

In this methodology document, both the Administrator and Calculation Agent of the BRR are exclusively listed as "Crypto Facilities Ltd", based at an address in the City of London:

Contact Details: Crypto Facilities Ltd 4th Floor 25 Copthall Avenue London EC2R 7BP

 

Web: https://www.cryptofacilities.com Phone: +44 20 7655 6085 Email: contact@cryptofacilities.com

So who or what is “Crypto facilities Ltd”?  Looking at the UK Companies registration web site (Companies House), reveals that "Crypto Facilities Ltd" was incorporated on 12 August 2014 as a private limited company in the UK.

According to Companies House, "Crypto Facilities Ltd" only has one director, a certain Timo Schlaefer.

Who is this Timo Schlaefer? According to LinkedIn, Timo Schlaefer was with the Vampire Squid Goldman Sachs between 2011 to 2015. Strangely though, the header of Schlaefer"s LinkedIn profile still says “Goldman Sachs”.

LinkedIn screenshot https://uk.linkedin.com/in/timoschlaefer/en

Then there is a Bitcoin Magazine article about Schlaefer dated February 2015 which describes him as “Executive Director in Credit Quantitative Modelling at Goldman Sachs.”

In summary, here we have a new Bitcoin futures contract, a derivative on the global phenomenon that is Bitcoin, whose settlement price is based on a reference rate calculated in London by an unknown company whose sole director is from Goldman Sachs.

But there is nothing to worry about, because CME also confirms that there is an Oversight Committee for this Bitcoin Reference Rate calculation. This committee has the impressive title of the “Bitcoin Pricing Products Oversight Committee”, and the Committee:

“has been established jointly by Crypto Facilities Ltd. (“CF”) and Chicago Mercantile Exchange Inc. (“CME”).

 

The initial members of the Oversight Committee and its Chairman shall be appointed jointly by CF and CME”

While we will leave you to ponder what all of this means, its difficult to imagine that US dollar cash-settled CME Bitcoin Futures were on Satoshi’s radar when he typed “Chancellor on brink of second bailout for banks” into his computer on January 3, 2009, hitting the enter key and kicking off Bitcoin’s genesis block and the creation of a new global system for disintermediating banks and sparking the emergence of an entire new universe of crypto currencies and blockchain platforms.

Financial Times: Sell Bitcoin Because The Market Is About To Become "Civilized"

On 31 October 2017, we discussed the announcement that the CME Group was responding to client interest and launching a Bitcoin Futures contract before the end of this year. CME stated that the contract would be cash settled based on the CME CF Bitcoin Reference rate, a once-a-day reference rate of the US dollar Bitcoin price at 4.00pm London time. In the run-up to the launch of the futures contract, the Financial Times has written a piece on the likely impact of futures trading on the Bitcoin price.

The title of the piece makes the FT’s view clear, “Prepare to bet against bitcoin as it becomes civilised”. We disagree with using the word “civilised” in this context (see below), but here is the FT’s take. 

In recent years, bitcoin has been the wild west of the financial world. Now, however, it is being civilised — a touch. In the coming weeks, the Chicago Mercantile Exchange plans to start listing bitcoin futures, with a centralised clearing mechanism. Cboe Global Markets may follow suit. That will enable investors to bet on the coin’s future value without actually holding it — just as investors can use the Chicago exchange to bet on hog prices, say, without ever handling a pig.

To its credit, the FT reflects the concerns from some CME participants that there is insufficient regulatory oversight and Bitcoin’s stratospheric vol could lead to significant losses for some traders.

Is this a good idea? Some of the CME’s members do not think so. This week Interactive Brokers, an important clearing firm in the exchange, took the extraordinary step of using a newspaper advertisement to ask for more regulatory oversight. It fears that bitcoin is potentially so volatile that these futures will create huge losses for traders, which might then undermine the health of the CME and hurt other brokers, given its part-mutualised structure. The CME — unsurprisingly — dismisses this as poppycock: it argues that any risks will be contained by rules that allow traders to charge more so as to generate fat margins (of about 30 per cent) and thus absorb losses, and by circuit breakers that would stop a trade in the event of wild price swings.

Our suspicion is that CME Group has seen the volume of Bitcoin trading and is determined to get its “cut”, whether or not some of its members take some big hits or not. It can deal with those issues if or when they occur. Anyway, the FT moves on to the more interesting subject of the impact on Bitcoin’s price. We should note that when the futures contract was announced the price surged more than $100 to a then all-time high of $645.

But while the regulatory debate bubbles on, there is a more immediate question facing investors: bitcoin prices. Until now, it has been an article of faith among bitcoin evangelists that if — or when — the currency became more “civilised”, this will boost the price. After all, the argument goes, assimilating bitcoin into the mainstream investment world should boost its appeal and demand, making it more valuable.

As the FT alludes to in the articles title, it expects the Bitcoin price to fall.

It is highly likely there will be an opposite effect. Until now, investors have not had an easy way to bet against bitcoin — the only “short” was to sell coins. But the CME futures contract will let investors place those negative bets. You do not need to be a conspiracy theorist to imagine that some bitcoin cynics will be doing just that.

To support its case, the FT cites the example of Japan launching equity derivatives in 1989, just before the bubble burst.

Think, for example, about Japan. Before the mid-1980s, its stock market seemed to exist on a planet of its own, subject to its own valuation rules. But when Japanese equity derivative contracts were launched, and then integrated within the wider global market system as a result of financial reform, that sense of “otherness” broke down. The change in how Japan was seen through a comparative investment lens was not the only reason for the 1990 Nikkei crash, but it contributed.

We have a slight problem with using this as an analogy for Bitcoin. Firstly, an ultra-hawkish BOJ-governor was nominated in mid-1989 who announced his intention to crackdown on house price inflation and the shadow banking system which was facilitating much of the leverage. Secondly, all bubbles burst and Japan’s was extreme. For example, depending on whether you use the highest per square metre property deal in the Ginza district, or one in the Chiyoda district, the land underneath the Imperial Palace was valued between $852 billion and $5.1 trillion at the time. Futures trading, we would suggest, played a tiny role.

The FT cites the launch of trading in the ABX Index prior to the sub-prime crisis, as another example.

So too with US mortgages. Until 2005 or so, outsiders could not easily assess or price the risks of America’s subprime mortgages: mortgage-backed bond prices were opaque, and the only way to short the market was to sell bonds. But when mortgage derivatives, such as the ABX index, were launched, it suddenly became easy to make negative bets. Then, the ABX index was published in newspapers, such as the Financial Times, in 2007, creating a visible barometer of sentiment. That helped a sense of panic to feed on itself after 2008.

Once again, we would suggest the FT is confusing the impact of derivatives with an inevitable reversion of market price of an asset in a bubble as expectations regarding the outlook changed. In the case of sub-prime, housing prices in the US had never fallen, then they did, the AAA-ratings of the bonds were manifestly incorrect and the dramatically overpriced sub-prime bonds were pledged as collateral in all manner of other risky, leveraged trades.

From our perspective, the impact of the futures launch is difficult to gauge as it depends on the interaction of two opposing forces.

Firstly, as cryptocurrencies gradually become accepted as an asset class, more institutional money is likely to enter the sector and holding long futures positions is one way to do it.

 

Secondly, as the article notes, Bitcoin futures will be settled in cash, which means there is potential for the volume of futures trading to vastly outweigh the buying and selling of “actual” Bitcoins. If this occurs, then the “tail can wag the dog” as price discovery is dominated by futures trading. This permits all manner of market abuse via naked short selling by investors, major banks and any “official” players who deem it necessary to manipulate the Bitcoin price.

For this reason, we don’t agree that adding a futures contract will necessarily “civilise” Bitcoin, indeed, it might have the opposite effect.

The second scenario precisely describes the state of the “gold” market today. According to the Reserve Bank of India’s estimate, the ratio of “paper gold” trading to physical gold trading is 92:1, meaning that the price of gold on the screens has almost nothing to do with the buying and selling of physical gold. This makes the gold market and, therefore, the gold price something of a mockery. As Zero Hedge has highlighted time after time, the gold price has frequently been subject to waterfall declines, as huge volumes of gold futures are dumped on the market with no regard for price. See "Gold Slammed After Someone Pukes $4bn Notional In Gold Futures" on 10 November 2017. Perhaps the FT journalist, Gillian Tett, could write an article on gold, instead of Bitcoin, explaining how the price of the former – a widely viewed indicator of financial risk – is being suppressed by derivative trading. Indeed, Tett was present at a private dinner in Scott’s of Mayfair several years ago when the Gold Anti-Trust Action Committee gave a presentation on exactly the same process which she expects to lower the Bitcoin price.

Where There's Smoke...

Central banks around the world have colluded, if not conspired, to elevate and prop up financial asset prices.  Here we"ll present the data and evidence that they"ve not only done so, but gone too far.

When we discuss elevated financial asset prices we really are talking about everything; we"re talking not just about the sky-high prices of stocks and bonds, but also of the trillions of dollars’ worth of derivatives that are linked to them, as well as real estate in dozens of countries and locations.  All are intricately linked together. For instance, stocks are elevated, in part, because bond yields are so low.  Sam for real estate. 

Here are three questions most alert investors are asking:

• Question #1: When will financial assets ever ‘correct’ and fall in price?


• Question #2: How much does overt propping by the central banks have to do with today"s elevated prices?


• Question #3: How much does covert propping by central banks play a role in these inflated markets?

These are important questions to consider because if central banks have been too involved and gotten themselves mixed up in trying to ‘wag the dog’ by using elevated financial asset prices as a means to drive economic expansion -- then the risk is a big implosion in financial asset prices if their efforts fail. 

The difficulty, as always, is that you can"t print your way to prosperity.  It"s never worked in history and it won"t work this time either.  You can, however, print (or borrow) to delay a correction, after which a boost in real economic growth (or additional income) had better materialize to save your bacon.   But if enough growth does not emerge to both pay back all the old outstanding loans plus all the newly created debt and currency, then you"re going to experience a worse correction than if you had not tried to print/borrow your way to prosperity.  

As I’ve outlined before, that economic boom the central banks have been staking everything on been MIA the entire time during the “recovery” following the Great Recession.  And there’s no sign of it showing up any time soon.

The latest Atlanta Fed GDPNow forecast for the US stands at a paltry 0.5%:

(Source)

Folks, that just isn’t going to cut it. You cannot justify a massive increase in debt and sky-high stock and bond prices on the basis of such “growth.”   So something has to give.  Either much higher GDP (income) growth is right around the corner, or these financial asset prices are grotesquely over-inflated.

To explain this in depth, let"s tackle those questions above one at a time, in reverse order.

Question #3: How much does covert propping by central banks play a role in these inflated markets?

This one is fascinating. It takes forensic analysis and connecting a few dots to make the case that central banks are propping up a lot more than they admit to.  Before we begin, whether it is a central bank directly, or one of its agents or proxies, it doesn"t matter who"s doing the intervention if any one of these entities (or all of them) is responsible for goosing asset prices for the purpose of achieving a policy aim.

Second, my motivation here has nothing to do with having a trade going against me and then seeking to explain it away as some nefarious working of a secret group. 

Instead, this is about pointing out that the preponderance of evidence points to repeated and direct market intervention by “some entity” that appear to be very afraid to see stocks and bonds decline in price (or for gold to go up too much).

Here are three pieces of data for you to consider.

1. The NY Fed moved part of its market group operations to the same place that Citadel (one of the key ‘proxy" suspects in this story) and the Chicago Mercantile Exchange (CME) just magically happen to have their operations.  For those of you unfamiliar with the CME, that’s the place one uses massive leverage to participate in (or move) markets.  Futures, options and other derivative products which are the perfect vehicles for telegraphing loaded messages to all the robot computers that watch the CME feeds like hungry hawks.


2. The CME actually has a Central Bank Incentive Program.  The CME incentive programs are reserved for their very best (i.e., highest volume) customers.  So we can state, without question, that central banks are heavy participants at the CME.


3. No central bank admits to having any of the CME products on their balance sheet.

An additional fourth observation is that the equity markets continue to experience remarkable recoveries time and time again, even when only the slightest weakness in prices is seen, and at all key support levels. 

So let’s break all that down and dig a little deeper.

The (cover) story behind the NYFed moving its market-oriented trading operations to Chicago was because they allegedly got worried by superstorm Sandy and wanted to relocate a little further inland, away from the effects of any future such storms. 

It’s just a massive coincidence that the chosen spot happens to be right where the CME lives:

Wary of natural disaster, NY Fed bulks up in Chicago

April 14, 2015

The New York branch of the U.S. Federal Reserve, wary that a natural disaster or other eventuality could shut down its market operations as it approaches an interest rate hike, has added staff and bulked up its satellite office in Chicago.

Some market technicians have transferred from New York and others were hired at the office housed in the Chicago Fed, according to several people familiar with the build-out that began about two years ago, after Hurricane Sandy struck Manhattan.

Officials believe the Chicago staffers can now handle all of the market operations that are done daily out of the New York Fed, which is the U.S. central bank"s main conduit to Wall Street

(Source)

Shortly after this news became known (and there is only this sole Reuters article to pull from, I couldn’t find any other major news outlet that covered it)  some sharp eyes at ZeroHedge noticed that the new job offerings that opened up soon after in the Chicago area included this job description element: Perform account services to foreign central banks, international agencies, and U.S. government agencies.

You’ll find out why that’s meaningful in the next few paragraphs.  It will support the contention that moving the Fed"s offices to the Chicago area might have had less to do with superstorm Sandy and more with preventing superstorm financial meltdowns.

Now let’s look at the CME"s Central Bank Incentive Program ("CBIP").  Here’s the notice from the CME webpage.

(Source)

The first two things we note in the program is that it heavily discounts fees to central banks to help them conduct “proprietary trading of CME products.”  As a reminder, those "products" are options and futures (both leveraged derivatives). 

We can also note that the program is reserved for non-US central banks (more on that in a minute) and that the trading can be conducted by a “manager or representative.”  Could that representative or agent be a NYFed staffer?  We don’t know, but it’s not forbidden in the rules. And we know the NYFed was actively recruiting for people whose job description included the duty of “Perform account services to foreign central banks, international agencies, and U.S. government agencies.”

Next, let’s take a look at the most recent discount schedule for the CBIP and see what it can tell us:

Well, first up it’s obvious that the central banks are playing with a huge array of leveraged derivative products.

Second, we might glean something from the offered discounts.  Assuming that the heavier the trading the greater the discount, this table makes sense to me.  Everything in yellow has a discount of 30% or greater.

The heaviest discounts are applied to Eurodollar futures and options, a category that makes perfect sense for central banks to play in given their legal role and public mandates. 

Coming in next in order are US Treasury futures and options. Again, these make sense if central banks have exposure to US Treasury bonds that they’d like to hedge, and I have no complaint with these.

However, I cannot find a good reason that central banks should be monkeying around in US stock futures.  Nor can I make a good case for energy, agricultural or metal contracts.  Yet they all appear on there.

Note in orange at the bottom are thee metals contracts. We can deduce that they are bought and sold by central banks, but coming in at a 27% discount, perhaps not in the same large quantities as other products.  This doesn’t seem odd to me because the commercial bullion banks do such a good job of smashing gold and silver with disturbing regularity and zero regulatory response. Perhaps the central banks only feel the need to intervene every so often.

Finally, I have no idea what “Other financial products” are at the CME but they"re traded often enough to garner the largest discount (49%) on the entire table.  One wonders if perhaps this isn’t a “masked bucket” that includes everything the central banks would prefer was not revealed at all.

The central bank that I could imagine might have some justification for hedging stock exposure, as opposed to buying stock futures to goose the market at key moments, would the Swiss National Bank because they have about $60 billion in direct US equity ‘investments.’

But there’s nothing remotely on here that looks anything like a CME option or future product:

(Source)

Nor is there anything on their income statement that looks like a CME related gain or loss.

Further, I have not been able to find a single central bank that admits to using CME products. But we know that they are, so having some secrecy there is clearly important to them.  This supports the “market propping” idea because admitting such a thing is simply a big no-no….unless you are the Bank of Japan which not only buys equities and ETFs hand over fist, but openly does so specifically on down days when the Japanese stock markets could use a helping hand going in the “right “ direction (which is always "up").

The Fuse Is Lit...

Many people might be tempted to shrug their shoulders and say “why should I care if the central banks are monkeying around the in the markets?”

In Part 2: The Coming Conflagration, where we answer Question #2 and the all-important Question #1 raised above, it becomes abundantly clear why all of us should care -- deeply. A tumble from these heights would destroy jobs by the millions, wipe out trillions of (phony) wealth, and invite great populist angst opening up the possibility of truly horrible leaders to emerge.  As I’ve quipped to some people, if you don’t like Trump you are going to positively *hate* whoever comes next if the current wealth gap persists (or worsens). But make no mistake: it will be the ordinary people who will be forced to eat the losses when all this blows up. So we should care. As well as remain very alert to what the Federal Reserve and other central banks are doing. Because if they fail, it’s our wealth, our jobs -- and possibly even our lives -- on the line. Click here to read the report (free executive summary, enrollment required for full access)