The International Swaps and Derivatives Association (ISDA) said developing contractual standards and documentation templates for digital asset derivatives is a priority this year.
“Robust contractual standards for digital asset derivatives will promote greater efficiency, deeper liquidity, and reduced risk in this fast-growing market,” ISDA CEO Scott O’Malia wrote in a Jan. 18 blog.
Crypto assets have seen explosive growth in recent years, with a market value of around $3 trillion, and are attracting the attention of institutional investors and banks. O’Malia points out that over-the-counter (OTC) derivatives have a key role in expanding market access, risk management and price discovery, deepening liquidity, and providing greater flexibility to investors.
In his post, O’Malia stated that ISDA is now developing legal standards to support the crypto derivatives market. It is gathering input from a range of stakeholders to align the crypto derivatives market with the existing spot market. In 2021, ISDA established the ISDA Digital Assets Legal Group and published a paper that explores the key issues related to contractual standards for OTC derivatives, including disruption events, valuation, and documentation.
At present, institutions have largely traded digital asset derivatives using amended versions of existing ISDA definitions and templates or using their own documentation, which creates a lack of standardization.
“There are several distinctive features and events that need to be considered in any standard derivatives documentation. These include forks, where a blockchain is upgraded or modified, which can change the nature of the blockchain or lead to the creation of two distinct crypto assets. These types of disruption events can impact the valuation, settlement, collateral, and legal viability of a transaction, so it’s important the documentation clearly identifies and defines the relevant events, as well as the potential consequences,” O’Malia wrote.