ISDA releases standardised set of definitions for digital asset derivatives
26 January 2023 US
Image: AdobeStock/Feng Yu
The International Swaps and Derivatives Association (ISDA) has produced standardised documents for trading in digital asset derivatives.
These definitions are designed to deliver an unambiguous contractual framework for digital asset derivatives under the ISDA Master Agreement, thereby delivering greater clarity for execution and settlement of digital asset derivatives contracts.
In the first release, these definitions will include non-deliverable forwards (NDFs) and options contracts on bitcoin and ether. However, ISDA indicates that these will potentially be extended to embrace a wider set of digital product types, including tokenised securities and other digital assets supported on distributed ledger technology (DLT).
The association notes that these definitions have been drafted using a controlled language structure to define the processes contained in the contract documentation, thereby promoting alignment with the common domain model (CDM) and automation via smart contracts.
ISDA chief executive Scott O’Malia comments: “Recent failures in the crypto market have emphasised the importance of having a clear, consistent contractual framework that spells out the rights and obligations of both parties following a default. All customers, whether retail or institutional, should know their assets are protected and understand their rights in the event of a default.”
He notes that this recent work to establish legal definitions – and to recommend improved customer protection in bankruptcy through the application of a consistent set of global contractual standards – adds to the work ISDA has already done to bring greater legal and operational certainty to digital assets executed on centralised and decentralised platforms.
“The innovative drafting style, which uses conditional statements that can be translated into code, means the definitions can be used more easily in DLT-based applications, creating significant efficiencies for market participants,” says O’Malia.
More broadly, ISDA has released a white paper which explores the legal implications of the collapse of FTX and other digital asset execution providers, including questions of ownership rights and intermediation of customer assets in the cryptoasset arena.
This will be the first of two reports that ISDA will publish on this subject. This first paper focuses on close-out netting and collateral. The second will address issues relating to customer digital assets held with intermediaries, exploring how they may be held, how they may be treated in an insolvency scenario, and documentation and due diligence that must be in place to deliver the required level of asset protection.
These definitions are designed to deliver an unambiguous contractual framework for digital asset derivatives under the ISDA Master Agreement, thereby delivering greater clarity for execution and settlement of digital asset derivatives contracts.
In the first release, these definitions will include non-deliverable forwards (NDFs) and options contracts on bitcoin and ether. However, ISDA indicates that these will potentially be extended to embrace a wider set of digital product types, including tokenised securities and other digital assets supported on distributed ledger technology (DLT).
The association notes that these definitions have been drafted using a controlled language structure to define the processes contained in the contract documentation, thereby promoting alignment with the common domain model (CDM) and automation via smart contracts.
ISDA chief executive Scott O’Malia comments: “Recent failures in the crypto market have emphasised the importance of having a clear, consistent contractual framework that spells out the rights and obligations of both parties following a default. All customers, whether retail or institutional, should know their assets are protected and understand their rights in the event of a default.”
He notes that this recent work to establish legal definitions – and to recommend improved customer protection in bankruptcy through the application of a consistent set of global contractual standards – adds to the work ISDA has already done to bring greater legal and operational certainty to digital assets executed on centralised and decentralised platforms.
“The innovative drafting style, which uses conditional statements that can be translated into code, means the definitions can be used more easily in DLT-based applications, creating significant efficiencies for market participants,” says O’Malia.
More broadly, ISDA has released a white paper which explores the legal implications of the collapse of FTX and other digital asset execution providers, including questions of ownership rights and intermediation of customer assets in the cryptoasset arena.
This will be the first of two reports that ISDA will publish on this subject. This first paper focuses on close-out netting and collateral. The second will address issues relating to customer digital assets held with intermediaries, exploring how they may be held, how they may be treated in an insolvency scenario, and documentation and due diligence that must be in place to deliver the required level of asset protection.
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