ISDA Advances Work to Develop Standards for Crypto Derivatives

Contractual standards for digital asset derivatives will provide a foundation for the market and help enhance transparency, liquidity and price discovery.

ISDA (International Swaps and Derivatives Association) has published a new paper exploring key issues it will seek to incorporate in new legal standards and documentation for crypto derivatives.

The industry body has recently established a new working group dedicated to this initiative.

The new paper is part of ISDA’s efforts to bring together derivatives market participants, the crypto-asset community and other stakeholders to help develop common legal standards and definitions for digital asset derivatives, which will improve transparency and liquidity and lower risk in the crypto industry.

“We must respect crypto assets are a unique product class and draft the definitions and legal terms accordingly,” said ISDA chief executive Scott O’Malia.

ISDA says digital asset derivatives will help to increase transparency and liquidity in the digital assets market by facilitating price discovery and allowing market participants to hedge risk, but that this market must be based on “firm foundations”.

The new contractual standards will be central to the development of a safe, efficient digital asset derivatives market, the industry body says.

The paper explores the key issues ISDA will address as part of this work, including work to identify technology and market-driven events that could disrupt the operation of a digital asset derivatives transaction, and provide a framework for dealing with these events. Such disruptions could occur as a result of cyber attacks, forks, and airdrops.

It also explores how digital assets – and the derivatives that reference them – can be valued, and what happens when a valuation cannot be obtained.

The paper also analyses how digital assets might interact with ISDA’s existing documentation architecture, including the ISDA Master Agreement and industry standard collateral documentation.

ISDA plans to develop digital product templates and definitions. The paper explains how these can be integrated within the operational and technological infrastructure being designed and implemented across the digital asset ecosystem.

A supplement to the paper has also been published, setting out a granular, technical analysis of different ISDA product definitions and their potential applicability to digital asset derivatives.