First Uncleared Crypto Derivatives Trades Executed on Clear Markets Regulated Platform with Risks Managed on R3’s Corda

A New Way to Trade

Pioneering counterparties successfully executed the first uncleared crypto options trade on a regulated platform, using Bitcoin (BTC) as collateral held in multiple 3rd party custodians – an extremely important milestone as the rapidly growing institutional crypto and digital assets market continues to develop. This was achieved through the implementation of a unique, bankruptcy-remote, multi-custodian collateral network, leveraging the industry-leading regulated Clear Markets trading platform. By working on these transactions, counterparties involved are all playing key roles in building a more open, secure and safe ecosystem for all participants.

The involvement of R3 and its distributed application platform, Corda, alongside industry partner, SBI Group, a prominent player in the institutional crypto market, played fundamental parts in facilitating these transactions by ensuring robust risk management. The result achieves a reduction in the cost of moving the collateral and enables increased frequency of variation margin payments, which in turn cuts time between price changes and reduces the credit risk.

The Evolution of Crypto Derivatives

As we pass this important milestone in transforming financial services and the global economy, note its place in the broader market setting. Digital assets, including cryptocurrencies, have gained significant attention and adoption in recent years, leading to the emergence of derivatives and other financial instruments tied to these digital assets. Derivatives play a vital role in enabling investors to hedge risk and gain exposure to the crypto market without directly owning the underlying assets.

Many derivative trades run through centralized clearinghouses, which act as intermediaries and manage counterparty risk. Uncleared crypto derivatives may be more complex, presenting a new challenge due to the volatility and unceasing trading hours of cryptocurrencies.

Todd McDonald, Co-Founder and CSO at R3, added that these “Challenges in broader crypto markets were driven by exchanges acting as custodians, operating in the dark, where users didn’t have 100% certainty where their funds were.”

Therefore, counterparties needed an innovative solution to ensure the smooth execution of these complex transactions and manage their risk.

Enter the Clear Markets Platform

Clear Markets is a leading innovator, developer, and operator of electronic marketplaces and trading technologies. The Clear Markets team applied lessons learned in decades of experience in derivatives and collateral management to deliver safer crypto derivatives trading on a regulated platform.

Designed for institutional trading and regulated by the U.S. CFTC and U.K. FCA, their platform emerged as the solution for uncleared crypto derivatives trades.  “We’re bringing crypto-native participants, with all their liquidity, onto a regulated crypto-trading platform that is accessible to US investors, bridging two market segments for over-the-counter swaps, forwards and options,” said Clear Markets Chief Executive Officer Mark Brickell.

Remaining Risk-Free with R3

R3’s Corda played a pivotal role in ensuring robust risk management for the uncleared crypto derivatives trades, and that all relevant protocols were achieved.

The Clear Markets system automatically identifies whether two parties have sufficient collateral to meet each other’s requirements before a trade happens. Once that’s confirmed, the collateral is locked at the custodian and recorded using Corda. This unique collateral network connects qualified custodians holding collateral in a bankruptcy-remote manner.

The network enhances risk assessment capabilities and allows effective collateral management throughout the lifecycle of the derivative contracts. This risk management practice aligns well with the International Swaps and Derivatives Association’s (ISDA) framework for uncleared derivatives.

Brickell, a former ISDA Chairman, added, “R3’s flagship platform, Corda, played a major role by sharing trade data and collateral information, and moving collateral in real time, with security and appropriate transparency among counterparties, custodians, and other relevant parties.”

The Support of SBI Group

With institutional investors entering the digital asset markets in earnest, the SBI Group is continuing to support the building of an enduring digital financial ecosystem by entering critical businesses related to crypto-assets and the underlying technology, such as distributed ledger technology (DLT) and blockchain.

SBI Group played a leading role as a counterparty in these ground-breaking trades, and its involvement highlights the growing interest and participation of institutional players in the crypto space. As a prominent counterparty, SBI Group brought credibility and expertise to the table, further boosting confidence in the uncleared crypto derivatives market. SBI’s active engagement underscores the maturing institutional adoption of cryptocurrencies and the increasing recognition of their potential as a viable asset class.

Custom-tailored crypto derivatives are a market segment with huge potential because they allow traders to assume or hedge exposure to crypto without holding the tokens.  The SBI Group team played a major role in helping develop a safer way to use crypto derivatives, using it for these relatively volatile trades.

Building A Unique Collateral Network

Reflecting the global nature of derivatives activity, all transactions required cross-border and cross-jurisdiction industry collaboration. They were executed on Clear Markets’ regulated trading platform by trading counterparties in Japan and Singapore, using Bitcoin (BTC) as collateral held at custodians in the U.K. and Hong Kong – key global financial hubs. 

The unique multi-custodian collateral network linked by Corda ensures the safe custody of assets pledged as collateral by counterparties, and that all collateral is in place at the time of trade and can be bolstered by periodic payments in real-time on blockchain. By involving multiple qualified custodians, the risk of asset loss or misappropriation is also minimized – collateral is protected from loss in the event of a counterparty bankruptcy and is locked in an account at an independent custodian under a tri-party account control agreement.

This method of managing counterparty credit exposure, derived from traditional financial markets practices, eliminates significant risks taken by counterparties of FTX and other crypto trading units that have collapsed.

The Future of Digital Trade

The successful execution of the first uncleared crypto derivatives trades on a regulated platform, with risks managed on Corda, represents a significant breakthrough moment for the institutional crypto market. The use of the Clear Markets platform amongst all counterparties involved, combined with R3’s Corda for risk management, has paved the way for more sophisticated derivative products and improved risk mitigation techniques in the crypto industry.

With other industry-heavyweights, SBI Group, actively involved as leading counterparties, institutional interest in cryptocurrencies is poised to grow even further. As regulatory frameworks continue to evolve and market infrastructure strengthens, the future holds promising opportunities for institutional investors seeking exposure to the exciting and dynamic world of cryptocurrencies.

The importance of intra and inter-industry collaboration across various borders has also proved its value when it comes to innovation. The future for digital assets and trade will continue its rapid growth as this collaboration between key players in the space continues.

Read more in Clear Markets’ official press release.