Distributed Ledger Technology and Smart Contracts

The International Swaps and Derivatives Association (ISDA) has published the first in a series of guidelines for what it colloquially refers to as “smart derivatives contracts” (the Guidelines).* A smart derivatives contract is a derivative that incorporates software code to automate aspects of the derivative transaction and operates on a distributed ledger, such as a blockchain. This series of papers is intended to “provide high-level guidance on the legal documentation and framework that currently governs derivatives trading, and to point out certain issues that may need to be considered by technology developers when introducing technology into that framework.”

Derivatives have long been thought to be a fitting use case for smart contract solutions. It is little surprise that derivatives industry incumbents and startups alike are working on novel smart contract solutions to facilitate the execution and clearing of derivatives. Smart derivatives contracts have the potential to create significant efficiencies in the derivatives market by automating the performance of obligations and operations under a derivatives contract.   Derivatives settlement is largely reliant upon conditional logic informed by certain data points that can be made available via oracle. 
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This post builds upon an idea presented in Part 4 of current series of posts on considerations for investment funds and advisers related to cryptocurrency derivatives.

In particular, this post provides additional perspectives on the relationship of leverage, margin, and financing to two commodity interests: “retail commodity transactions” and a “swaps”.  We decided to present these comments separate from the current multi-part series on cryptocurrency derivatives, since the topic may appeal to a broader audience than funds and advisers.

This post was co-authored with Michael Selig, an associate attorney in the New York office of Perkins Coie.


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This post is the fourth in a series that outlines key considerations for investment funds and their advisers regarding the application of the U.S. commodity laws to cryptocurrency derivatives.  This post is intended to be a primer on the topic and is not legal advice.  You should consult with your counsel regarding the application of the U.S. Commodity laws to your particular facts and circumstances.

In this Part 4, we discuss the commodity interests that are likely to be of greatest interest to crypto funds and advisers: futures contracts, swaps and retail commodity transactions.

At the outset, a sincere thanks goes out to Conor O’Hanlon and Michael Selig for their invaluable assistance and time spent thinking through many of the issues that are at this heart of this post and, more generally, this series.


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Earlier today, CFTC Commissioner Brian Quintenz spoke at a conference hosted by ISDA in London.  His remarks focused on the central theme of  that conference – the power of technology to transform financial markets.  In this posting, we will provide highlights from Commissioner Quintenz’s speech, as we believe that this speech addresses several key concepts related to FinTech initiatives in the derivatives markets.
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Earlier today, LabCFTC released, “A Primer on Virtual Currencies,” which it describes as being the first of a series of publications “to help market participants and innovators navigate the FinTech landscape”.  The publication, which provides an overview of “virtual currencies and their potential use-cases,” is noteworthy for several reasons:
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Earlier today, the International Swaps and Derivatives Association (ISDA) sponsored a webinar, “The Foundations of an Efficient Market Infrastructure,” that focused on an initiative by ISDA’s Market Infrastructure and Technology Committee to facilitate the adoption of emerging technologies (DLT, smart contracts)into the trading, documentation and processing of derivatives.

The focus of the conference was on derivatives processing and reporting; however, the issues that plague derivatives are relevant to many other financial market processes and activities.  Specifically, the primary challenge with respect to derivatives – a strained infrastructure that is too costly and inefficient to be sustainable – is common throughout the financial markets.  Or, put  differently, the development of technological solutions within the derivatives sector has the potential to become a template for the resolution of similar issues in other sectors of the financial marketplace.  For this reason, today’s webinar may have an appeal that is broader than market participants with an interest in the process of derivatives.

The remainder of this message contains a summary of the information discussed at this informative webinar.
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