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ISDA will bring together derivatives market participants, members of the crypto-asset community and other stakeholders to help develop common legal standards and definitions for digital asset derivatives, recognizing that crypto assets are a unique product class. This paper (i) identifies novel technology and market-driven events that could disrupt the operation of a digital asset derivatives transaction and provides a framework for dealing with these events; (ii) explores how digital assets (and the derivatives that reference them) can be valued and what happens when a valuation cannot be obtained; and (iii) analyzes how digital assets might interact with the existing ISDA documentation architecture, including the ISDA Master Agreement and industry standard collateral documentation. ISDA has also produced a supplement to the paper that sets out a granular, technical analysis of different ISDA product definitions and their potential applicability to digital asset derivatives.

Although the past months have seen an increase in attention for decentralized derivatives in DeFi, the space is still absolutely tiny compared to the traditional derivatives market and is expected to grow exponentially to the total growth of DeFi. Let's take a closer look at some of the derivative protocols available in DeFi today. Most of the protocols available today are limited to offering options, however some protocols stand out due to novel mechanisms or advanced features. In this piece we will compare the protocols on some key facets that will help traders find their ideal protocol and investors find investment opportunities in decentralized derivatives.

95% of trades in the crypto derivatives market happen across futures based on 3 main crypto currencies: BTC, ETH and EOS. At the same time, the top 6 exchanges currently take approximately 83% of all derivatives trading volume. This dominance by large exchanges is however increasingly challenged by new market entrants that specialise on new products such as options and derivatives on alternative crypto currencies. Unlike in traditional finance, where most volumes are concentrated in Western economies, crypto derivatives are overwhelmingly traded on exchanges based in Asia. Singapore especially has been chosen by many companies as its operational base due to its reputation in the financial industry and its openness for innovation by regulatory bodies.

The International Swaps and Derivatives Association (ISDA) has established a new digital asset legal and documentation working group. As it stands, institutions trading digital asset derivatives typically use an amended version of existing ISDA definitions and templates 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. The new working group will focus on developing specific legal standards for crypto derivatives, in the same way there is for interest rate, FX, equity, credit and commodity derivatives.

Coinbase intends to enter the derivatives trading markets, having acquired the FairX derivatives exchange. FairX is a Designated Contract Market derivatives exchange regulated by the Commodity Futures Trading Commission. FairX only launched in May 2021, but it has already secured brokerage partnerships with TD Ameritrade and E*Trade, and 18 others. Coinbase said the acquisition is a "key stepping stone on Coinbase's path to offer crypto derivatives to retail and institutional customers in the US."

"ISDA is now working to develop legal standards to support the crypto derivatives market, with input from a range of stakeholders, including those active in the crypto space. The aim is to align the crypto derivatives market with the existing spot market by creating strong legal foundations. Last year, we established the ISDA Digital Assets Legal Group and, in December, we published a paper that explores the key issues that need to be addressed in any contractual standards for OTC derivatives, including disruption events, valuation and documentation."

Digital Asset is collaborating with ISDA to develop a new tool that can support the use of smart contracts for derivatives trading. The collaboration focuses on creating interoperable technical solutions that advance standardization to allow for greater automation of derivatives trade management.

Zero Hash, the crypto-focused affiliate of Seed CX, has launched support for derivatives, allowing participants to settle bilateral derivative transactions.

The bitcoin derivatives market is fragmented and contract terms differ dramatically across exchanges. The quality of documentation in the space varies. Perpetual swaps approximate the price of its underlying asset in close to real time. They are shifting away from bitcoin-margined inverse contracts, which have traditionally been dominant, toward USDT-margined linear contracts. Exchanges also vary in how they calculate indexes and funding payments. Perpetual swap volumes have decreased since the start of the year, but have recently surged in line with bitcoin's price activity. The lack of standardization in the derivatives market makes it difficult for traders to assess the degree of risk taken on indirectly via a position's index. Poorly constructed indexes can negatively impact users, especially during market dislocations and periods of volatility.

Respondents to the Monetary Authority of Singapore's November 2019 consulation were broadly supportive of its proposals as to how to regulate payment token derivatives offered by an "Approved Exchange" as well as to not regulate at non-approved exchanges. The MAS agreed and said regulating non-approved exchanges would confer "misplaced confidence" - especially for retail investors. https://www.mas.gov.sg/publications/consultations/2019/consultation-paper-on-proposed-regulatory-approach-for-derivatives-contracts-on-payment-tokens

Binance will wind down its futures and derivatives products offerings in Germany, Italy, and the Netherlands. With immediate effect, users from these countries will not be able to open new futures or derivatives products accounts. With effect from a later date to be announced in a further notice, users from these countries will have 90 days to close their open positions.

The International Swaps and Derivatives Association (ISDA) published new standard digital assets derivatives definitions and documentation, to create an unambiguous contractual framework under the ISDA Master Agreement umbrella. The definitions initially cover non-deliverable forwards and options on Bitcoin and Ether, but could be expanded cover other distributed ledger technology (DLT) based digital assets. The definitions have been drafted to facilitate Common Domain Model integration and automation within smart contracts.

"China's Futures and Derivatives Law (FDL), which takes effect today, marks a historic moment for the country's over-the-counter derivatives market. By enshrining the enforceability of close-out netting in law, the FDL removes a significant barrier to the development of a well-functioning derivatives market, paving the way to greater domestic and international participation and more effective risk management."

"We consider a continuous-time financial market with no arbitrage and no transactions costs. In this setting, we introduce two types of perpetual contracts, one in which the payoff to the long side is a fixed function of the underlyers and the long side pays a funding rate to the short side, the other in which the payoff to the long side is a fixed function of the underlyers times a discount factor that changes over time but no funding payments are required. Assuming asset prices are continuous and strictly positive, we derive model-free expressions for the funding rate and discount rate of these perpetual contracts as well as replication strategies for the short side. When asset prices can jump, we derive expressions for the funding and discount rates, which are semi-robust in the sense that they do not depend on the dynamics of the volatility process of the underlying risky assets, but do depend on the intensity of jumps under the market's pricing measure. When asset prices can jump and the volatility process is independent of the underlying risky assets, we derive an explicit replication strategy for the short side of a perpetual contract. Throughout the paper, we illustrate through examples how specific perpetual contracts relate to traditional financial instruments such as variance swaps and leveraged exchange traded funds."

The International Swaps and Derivatives Association (ISDA) is collaborating with the digital asset industry to establish contractual standards for crypto derivatives. In a DerivSource Q&A, Mark New, senior counsel, Americas at ISDA, discusses what the forthcoming standards will look like, how they will cope with digital asset-specific events such as forks and airdrops and what to expect next from the trade association.

QualitaX published a paper on the ERC-6123, an open-source standard for creating and managing derivative contracts on Ethereum and EVM-compatible networks. By leveraging ERC-6123, market participants can benefit from a more streamlined, secure, and efficient approach to derivatives management, addressing many of the challenges present in traditional OTC markets.

"So, what exactly does one own when clicking 'buy' for these novel tokenized stocks? The short answer is you own a collateralized digital derivative product that can be traded much like the spot instrument, i.e. the share or 'real thing'. A derivative security references its value from a separate security that trades in the cash market. Both the derivative and spot instrument can generate profits and losses in lockstep in someone's trading account."

Decentralized derivatives exchange Opium has introduced credit default swaps (CDS) on Tether (USDT). In this case, a sharp drop in USDT's price from the usual $1 is used as a proxy for Tether turning out to be insolvent. So if the token fell to 70 cents, the writer of the contract would pay the buyer 30 cents at maturity. The CDS seller provides insurance through posting collateral in USD Coin (USDC), which is locked in a smart contract until maturity of the CDS contract. https://trade.opium.exchange/derivatives

The U.S. Department of Justice and the Commodity Futures Trading Commission (CFTC) have filed charges against crypto derivatives exchange BitMEX and its owner-operators. They are accused of operating a facility for the trading or processing of swaps without having CFTC approval as a designated contract market or swap execution facility, and operating as a futures commission merchant by soliciting orders for and accepting bitcoin to margin digital asset derivatives transactions, and by acting as a counterparty to leveraged retail commodity transactions. They are also accused of violating anti-money laundering (AML) and know-your-customer (KYC) regulations. https://www.cftc.gov/PressRoom/PressReleases/8270-20

ISDA has published the sixth in a series of legal guidelines for smart derivatives contracts. These guidelines provide high level background on the CDS market; identify opportunities for the potential application of smart contract technology to CDS; and highlight important issues for technology developers to consider when designing technology-enabled solutions for trading and processing CDS and associated processes. These guidelines also highlight areas where further industry collaboration will be required to identify existing areas of legal and regulatory uncertainty and to develop solutions.