Basis Trade at Index Close (BTIC) allows market participants to trade futures at a fixed spread to the reference price of a known benchmark index.
Since its introduction, BTIC functionality has become a popular vehicle for market participants to access futures contracts tied to the closing price of benchmark indices such as the Dow, Nasdaq-100, Russell 2000, and S&P 500.
As interest in cryptocurrency grows, BTIC functionality is being added to the CME Group suite of market-leading Cryptocurrency futures, which are linked to the CME CF Reference Rates that are the benchmark prices of bitcoin and ether as of 4:00 p.m. London time.
BTIC orders and transactions have their own unique tickers, providing market participants price discovery and transparency on the spread, or difference, between the price of the futures contract and the underlying index throughout the trading day.
For cryptocurrencies, the value of the spread, or basis, depends on the futures implied financing rate, the time left to contract maturity, and perceived volatility among other factors. The basis can either be negative or positive.
Once the official reference rate is published, the resultant futures of the BTIC transaction are cleared at a price equal to the reference rate, plus, the agreed upon BTIC trade price.
BTIC transactions completed by 4:00 p.m. London time will use that trade date’s Reference Rate to calculate the corresponding futures price while those BTIC transactions completed after 4:00 p.m. London time will be against the next trade date’s Reference Rate.
Additionally, eligible contract participants may negotiate BTIC block trades directly with another counterparty and submit the trade for clearing.
At 9:00 a.m. New York time/Eastern Time (ET), a bitcoin-focused fund manager receives an inflow of $5 million dollars which needs to be allocated to the benchmark CME CF Bitcoin Reference Rate (BRR) for that day.
With Bitcoin futures trading at $40,000 per bitcoin, she calculates that the fair value of the spread between Bitcoin futures and the BRR is plus $100 per bitcoin. She submits an order to buy 25 Bitcoin futures contracts via BTIC (ticker symbol BTB) at that spread of plus $100 dollars based on that day’s Bitcoin Reference Rate.
At the same time a trader on a crypto lending desk concludes he could save money by replacing his short physical bitcoin position with CME Bitcoin futures. He calculates that he needs to sell those futures at a basis of plus $100 dollars per bitcoin or higher.
He sees the fund managers bid on the order book and hits it. The BTIC trade is executed.
Having sold the futures via BTIC, the crypto lending firm can then purchase $5 million dollars’ worth of bitcoin in the OTC spot market against the BRR for that day to transpose his short physical bitcoin position to futures ‒ all aligned against the same daily benchmark reference rate.
The BTIC trade is complete.
The fund manager was able to expeditiously and efficiently gain exposure to bitcoin’s price while the crypto lending firm was able to shift their bitcoin exposure from the physical market to more capital-efficient futures. Shortly after 4:00 p.m. London time, the official BRR level of 40,500 is published. The trade is now settled.
The fund manager buys 25 Bitcoin futures contracts at a price of $40,600 which is a plus one-hundred basis to the BRR level, and the crypto lending desk sells them at the same price.
This illustrates how some crypto market participants may use BTIC, and how the mechanism can provide traders the ability to optimize their holdings between Bitcoin futures and physical bitcoin.
A wide range of other market participants may also use BTIC, including ETF providers, to efficiently manage the creation or redemption process around the NAV print, structured product desks to effectively hedge transactions, relative value desks to more precisely trade the bitcoin basis, and institutional traders looking to transfer risk between the physical bitcoin and futures markets, as well as, liquidity providers.
While we highlighted a Bitcoin futures example, BTIC is also available for Micro Bitcoin futures (MBT) and Ether futures (ETH) allowing market participants greater flexibility and choice. The BTIC orderbook allows real time price discovery in the futures market, as investors around the globe submit orders against the respective CME CF Reference Rate.
So, that’s how BTIC works. The basis trade at index close.