ISDA publishes documents on trading of digital asset derivatives

The International Swaps and Derivatives Association (ISDA) published a new standard documentation for trading digital asset derivatives last week.

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The ISDA Digital Asset Derivatives Definitions are intended to bring greater clarity to this asset class by creating an unambiguous contractual framework for digital asset derivatives. The definitions initially cover non-deliverable forwards and options on Bitcoin and Ether but could be expanded in the future to cover additional product types, including tokenized securities and other digital assets executed on distributed ledger technology (DLT).

Further, the definitions have been created using a controlled language structure to define the processes contained in the document, facilitating integration with the Common Domain Model and automation within smart contracts.

“Recent failures in the crypto market have emphasized the importance of having a clear, consistent contractual framework that spells out the rights and obligations of both parties following a default. All customers, whether retail or institutional, should know their assets are protected and understand their rights in the event of a default. This latest work to establish legal definitions and recommend improved customer protection in bankruptcy through the application of a consistent set of global contractual standards adds to the extensive work ISDA has already published to bring greater legal and operational certainty to digital assets executed on both centralized and decentralized platforms,” Scott O’Malia, ISDA’s chief executive, said.

The organization also released a new whitepaper that addresses some of the legal issues raised by the recent bankruptcies of major crypto exchanges and market participants.

The paper, entitled Navigating Bankruptcy in Digital Asset Markets: Netting and Collateral Enforceability, is the first of two publications that explore legal questions raised by the collapse of FTX and others. This paper focuses on the importance of close-out netting and collateral arrangements for derivatives referencing digital assets. It also identifies several focus areas for policymakers and market participants to ensure greater certainty, including using standardized contractual frameworks like the ISDA Digital Asset Derivatives Definitions and further legal clarity from national authorities on the property status of digital assets.

The second paper, which will be published later in the first quarter of 2023, will focus on issues related to customer assets held with intermediaries.