Disruptions unique to cryptocurrency markets will be incorporated into contracts for the global derivatives industry for the first time, in a move intended to broaden digital assets’ appeal to institutional investors.
Isda, the derivatives trade association, said on Tuesday it was developing common legal standards and templates for derivatives linked to the $3tn crypto market to cover “potential disruption events”.
The potential issues the London-based body singled out in a white paper included cyber attacks; forks, when a blockchain effectively splits into two branches; and airdrops, when the market is flooded with tokens, usually for free.
Isda’s master agreements are widely used as the legal template for most of the world’s derivatives trades in bonds, equities, currencies and other mainstream assets. Market participants generally follow its guidance on how to adjust contract terms if an unexpected event disrupts a derivative’s performance.
Scott O’Malia, chief executive of Isda, said the standards and definitions for digital derivatives would align with the underlying, or spot, market. “We must respect crypto assets are a unique product class and draft the definitions and legal terms accordingly,” he said.
The move comes as the crypto derivatives market soars in value and activity, and products such as bitcoin and ether futures on the Chicago Mercantile Exchange draw in more users.
Last month, average open interest for bitcoin and ether futures hit $4.3bn and $1.2bn respectively — the first time the exchange had seen monthly open interest in ether average more than $1bn, according to data from CryptoCompare. The derivatives market now represents 55 per cent of the total crypto market, it added.
As it grows, some of the biggest crypto market participants are stepping up their lobbying of regulators to try to shape the rules.
Last week Coinbase, the crypto exchange, and FTX.US, the derivatives trading market, both joined Isda, a long-established trade association whose members consist mainly of the world’s big investment banks and asset managers.
“Institutional market participants will be more willing and able to invest and trade in cryptoassets if the mechanisms to do so reflect current processes and standards,” said Kevin McPartland, head of market structure research at Coalition Greenwich.
If a cryptocurrency forks, market infrastructure providers such as trading venues, custodians and index providers may need to choose which branch of the asset to support, it said. Airdrops could have an impact on a derivatives transaction by causing an increase in the market value of the digital asset native to the benefiting network, it said.
Isda has begun a body of work to adapt its standards as traders and IT programmers explore the opportunities to trade derivatives contracts that are governed by computer code. Earlier this year it digitised its vast booklet of legal documents, the biggest overhaul to its rule book since 2006.
FTX has also pushed into the regulated derivatives markets by buying LedgerX, a cryptocurrency futures and options exchange and clearinghouse, for an undisclosed amount in October.
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