Further growth in the popularity of crypto assets is all but certain, but the challenge will be to guarantee the nascent market for digital asset derivatives is built on firm foundations, said the International Swaps and Derivatives Association’s (ISDA’s) CEO Scott O'Malia, when discussing crypto and the importance of its associated over-the-counter (OTC) derivatives issues.
O'Malia made the comment in ISDA’s publication, derivatiViews, in which he also detailed the purpose of the association’s new digital asset legal and documentation working group which will explore and create standards that respect the unique aspects of the crypto asset class and can be applied in a fully digital format.
The new working group will focus on developing specific legal standards for crypto derivatives, in the same way ISDA has previously done for interest rates, FX, equity, credit and commodity derivatives.
“Crypto assets have grown at a ferocious pace in recent years, but banks and institutional investors have only played a bit-part in that growth”, O'Malia cited. “I’m looking forward to engaging with the crypto community as we thrash out the various issues.”
As it stands, institutions trading digital asset derivatives typically use an amended version of existing ISDA definitions and templates or entirely bespoke documentation developed internally.
“That’s not ideal”, affirmed O'Malia, which “results in a lack of standardisation that may ultimately hamper transparency and liquidity and lead to higher levels of risk.”
The working group will also look at other critical legal issues including product scope, timing of valuation — given that digital assets trade 24 hours a day — as well as the impact of transaction fees and the implications of whether a trade is physically or cash settled.
“Addressing these topics is the starting point for developing the market-standard documentation that is critical for legal certainty, as well as ensuring robust processes are in place to deal with market disruptions or defaults,” O'Malia stated.
He concluded: “As the market for crypto derivatives continues to grow, it will become increasingly important that a robust framework is in place that enhances transparency and consistency and reduces risk.”
