Industry Body Clarifies What Happens When Crypto Derivatives Crash

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LONDON, Jan 26 (Reuters) – An industry body on Thursday set out a global framework for trading derivatives related to crypto-assets to avoid confusing ownership FTX-style meltdowns.

The International Swaps and Derivatives Association (ISDA) has published guidelines for trading digital asset derivatives to clarify what happens when things go wrong in an underlying market, such as the exchange crashing of crypto FTX.

While most of the recent issues have occurred in the cryptocurrency spot market, there are plenty of legal uncertainties that could affect digital asset derivatives as well.

The ISDA already oversees the “umbrella agreement” or model used by banks to trade trillions of dollars in derivatives around the world.

It will now include the body’s first standard documentation for digital asset derivatives trading, initially covering non-deliverable futures and options on Bitcoin and Ether.

It may be extended in the future to cover other types of products, including tokenized securities and other digital assets running on distributed ledger technology (DLT), ISDA said.

The framework sets out the rights and obligations of both parties to a derivatives trade following a market disruption, and the ISDA has also released discussion papers exploring the legal issues raised by FTX’s bankruptcy.

The collapse of FTX resulted in the loss of billions of dollars in client assets, raising questions about the ownership of assets held by a crypto exchange or intermediary.

“Recent failures in the crypto market have underscored the importance of having a clear and consistent contractual framework that spells out the rights and obligations of both parties following a default,” the CEO said. ISDA, Scott O’Malia.

“All clients, whether retail or institutional, should know that their assets are protected and understand their rights in the event of default,” O’Malia said.

Reporting by Huw Jones Editing by Bernadette Baum

Our standards: The Thomson Reuters Trust Principles.

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