The need for new approaches to assessing the risks of crypto derivatives
According to the published paper by the U.S. Federal Reserve, traditional methods of assessing the risks of financial instruments are not suitable for cryptocurrency-based derivative financial instruments (derivatives). The sharp fluctuations in cryptocurrency exchange rates, high volatility and unique features of the cryptocurrency market make it necessary to develop new models for calculating margin requirements for this asset class.
The paper notes that the current approaches to determining the size of the initial margin for crypto derivatives, based on historical data, do not reflect the real risks of this market. The high variability of cryptocurrency exchange rates may lead to the fact that during periods of sharp decline in their value, the current size of the margin may be insufficient to cover the losses of market participants. This, in turn, poses systemic risks to the entire financial system.
According to the experts of the Federal Reserve, it is necessary to develop new weighting coefficients for calculating the initial margin, taking into account the specifics of the cryptocurrency market. This will allow for more adequate coverage of the risks in trading crypto derivatives and reduce the likelihood of systemic failures.
Impact of new requirements on the crypto derivatives market
The introduction of new approaches to calculating the initial margin will have a significant impact on the cryptocurrency derivative financial instruments market. The size of the margin collateral will most likely increase, which will lead to a decrease in the liquidity of this market segment and an increase in the entry threshold for traders.
On the one hand, this will contribute to greater stability of the crypto derivatives market and a reduction in systemic risks. However, on the other hand, tightening the requirements for margin collateral may negatively affect the activity of traders and trading volumes. In addition, this may lead to a redistribution of volumes in favor of less regulated over-the-counter platforms.
In general, the approach proposed by the Federal Reserve can be considered justified from the point of view of ensuring the stability of the financial system. Nevertheless, regulators will have to find a balance between an adequate assessment of risks and maintaining sufficient liquidity in the crypto derivatives market.