Singapore-based QCP Capital and Japan-based SBI Alpha Trading announced on Thursday that they have executed a crypto options trade without involving a clearing house, marking the first such transaction in the digital asset industry. This uncleared trade, negotiated directly between QCP and SBI Alpha, used bitcoin (BTC) as collateral and was conducted on the UK-based regulated electronic marketplace, Clear Market.
London-based Zodia Custody served as the custodian for collateral, while Corda Network, developed by R3, played a significant role in risk management. The trade utilized a multi-custodian collateral network, ensuring that assets held in custody remained separate from the custodian’s assets. This network is resilient to bankruptcy, meaning that if the custodian goes bankrupt, the assets would still be protected.
In this groundbreaking transaction, the trading parties gathered the collateral at the beginning and locked it in an account with an independent custodian. Controlled by all three parties, this arrangement aimed to mitigate the counterparty risk that could arise from the absence of a clearing house. Generally, all exchange-traded derivatives and most over-the-counter derivatives involve a clearing house, which validates and finalizes the transaction, ensuring that the parties involved meet their contractual obligations.
Moreover, QCP and SBI Alpha introduced a feature that allows real-time bolstering of collateral by making periodic payments through the blockchain, all while protecting the collateral from loss in case of counterparty bankruptcy. This unique risk management technique aligns with the International Swaps and Derivatives Association’s (ISDA) requirements for uncleared derivatives in the multi-trillion dollar fiat currency swap business.
The press release stated that this method of managing counterparty credit exposure, derived from traditional financial markets practices, eliminates significant risks taken by counterparties of FTX and other crypto trading units that have collapsed. In addition, it reduces the cost of moving collateral and enables an increased frequency of variation margin payments, subsequently reducing the time between price changes and lowering credit risk.
While the lack of a clearing house may raise concerns, the pioneering risk management techniques implemented in this transaction help mitigate potential risks. As the digital asset industry continues to evolve, it will be interesting to see how traditional market practices are adapted to offer safer options for trading and investment.
Source: Coindesk
