The International Swaps and Derivatives Association has established a new digital asset legal and documentation working group to standards for crypto derivatives, according to ISDA CEO Scott O’Malia.
As it stands, institutions trading digital asset derivatives typically use an amended version of existing ISDA definitions and templates (for instance, ISDA’s equity or FX definitions) or entirely bespoke documentation they’ve developed internally. That’s not ideal: it results in a lack of standardization that may ultimately hamper transparency and liquidity and lead to higher levels of risk.
Crypto derivatives also have a number of unique characteristics that may mean existing definitions do not fully address specific events and risks that may arise. As an example, a blockchain used for a crypto asset might be upgraded or modified to fix bugs, known as a ‘fork’. This might be a ‘hard fork’, where a new blockchain is created that might co-exist with the old one, or a ‘soft fork’, where the established blockchain continues but under revised rules. This could fundamentally alter the nature of the blockchain or result in two distinct crypto assets with different values.
The new working group will focus on developing specific legal standards for crypto derivatives, in the same way it has for interest rate, FX, equity, credit and commodity derivatives. As well as looking at unique adjustment and modification events like forks, the working group will also think through other critical legal issues – for example, product scope, timing of valuation given digital assets trade 24 hours a day, the impact of transaction fees and the implications of whether a trade is physically or cash settled.
“We will also look to ensure these standards are suitable for integration with existing data models to the greatest extent possible. Work on these issues has already begun, and we expect to publish a paper identifying a path forward by the end of this year,” O’Malia wrote.