Singapore-based QCP capital and Japan’s SBI Alpha Trading announced on Thursday that they had executed a crypto option trade without the involvement of a clearinghouse, marking the first time such a transaction has been made in the digital assets industry.
According to a CoinDesk press release, the so-called cleared trade was negotiated between QCP, SBI Alpha, and used bitcoin as collateral. It was then executed on Clear Market, an electronic marketplace regulated in the U.K.
Zodia Custody, based in London, acted as the custodian of collateral. R3’s Corda Network was responsible for risk management.
The trade utilized a network of multiple custodians to separate the assets in custody from the assets of the custodian. The collateral is protected if the custodian becomes bankrupt.
To mitigate counterparty risk due to the lack of a clearinghouse, the trading parties locked up the collateral in a separate account with an independent custodian. This was controlled by the three parties. Clearing houses are involved in all exchange-traded derivatives, and many over-the counter derivatives. They validate and finalise the transaction to ensure the parties honor their contractual obligations.
QCP and SBI Alpha have also developed a feature that allows real-time bolstering collateral through periodic payments on the blockchain, while protecting collateral against loss in the event of counterparty bankruptcy.
The ISDA’s requirements for derivatives that are not cleared in the multi-trillion-dollar fiat currency exchange business is also consistent with this unique risk management technique.
The press release stated that ‘This method for managing counterparty exposure is derived from the traditional practices of financial markets and eliminates significant risk taken by counterparties who have been affected by the collapse of FTX or other crypto trading units’.
The statement continued, “This reduces costs of moving collateral and allows increased frequency of variations margin payments. This reduces time between price changes, and lowers credit risk.”