London-based digital assets firm Copper expanded its ClearLoop trading framework today to include collateral management for crypto derivatives, according to a release shared with Decrypt.
The rollout allows crypto derivatives to be traded over the counter (OTC) while significantly reducing risk for all parties involved. Another benefit is that it opens up the marketplace to a wide range of new institutional participants, who traditionally seek low-risk investment strategies.
“With the arrival of a fully developed collateral management framework to support the efforts of prominent market makers and others, we see great potential for further growth in the derivatives market,” said Dmitry Tokarev, CEO of Copper.
Why use over-the-counter derivatives?
OTC derivatives are often used by investors making larger trades to prevent slippage (when prices move while a large trade is being executed). But while such instruments account for over 65% of activity in the crypto markets, they can create a number of risks for counterparties, such as credit risk exposure and challenges in managing collateral.
Mitigating these risks is crucial, and it’s where ClearLoop steps in. The firm uses its native custody platform to be deposited into segregated “cold” wallets that remain locked until the trade is executed.
Doing so prevents the counterparty—the entity taking the other side of the bet—from not meeting their obligations or pulling out from the trade if it goes against their favor.
Tokarev explained the technology to reduce counterparty risk was, so far, absent in the crypto markets. “In the world of traditional finance, services that manage collateral are well established, however, in crypto, the bar to providing such services is set extremely high because of the advanced technology required,” he said.
GSR, a digital asset trading firm and an existing Copper client served as a key advisor in the product design process. Meanwhile, Copper will itself act as an independent third party for collateral management and settlement—meaning all collateral will remain within the platform to ensure security.