05.24.2022

ISDA: Crypto-Asset Risks And Hedging Analysis

05.24.2022
ISDA: Crypto-Asset Risks And Hedging Analysis

The crypto-assets market grew by three-and-a-half times in 2021 compared to 2020, to almost $3 trillion as of November 2021. Despite a reduction in recent months, this market is increasingly attracting interest from institutional investors, banks and policymakers. There is a growing number of new entrants into the crypto-assets market. This rapid growth has been accompanied by strong interest in crypto derivatives, as market participants increasingly look for ways to take synthetic exposure to crypto assets or to protect their crypto-asset holdings from adverse market risk. As in any market, derivatives play a vital role in enabling participants to manage risks, deepen liquidity and broaden market access.

The Basel Committee on Banking Supervision (BCBS) has made proposals for the prudential treatment of banks’ crypto-asset exposures that, if implemented, would lead to particularly punitive capital requirements for banks holding some types of crypto assets and disincentivize traditional financial intermediaries from playing an active role in crypto markets. ISDA believes an appropriate, risk-sensitive capital framework for crypto assets is essential, as set out in its response to the BCBS consultation. This would provide a suitable framework to allow banks to meet customer demand while ensuring capital levels are proportionate to the underlying risks.

ISDA has developed a new whitepaper, Crypto-asset Risks and Hedging Analysis, which demonstrates that hedging the most liquid crypto assets for which there is a two-way market, so-called Group 2a crypto assets, with their respective futures or exchange-traded funds (ETFs), is effective. The paper also demonstrates that the basis risk profile of Group 2a crypto-asset futures is comparable with that of existing financial assets. The capital treatment should therefore allow for offsetting for a given Group 2a crypto asset and its futures and ETFs.

The hedge effectiveness results set out in this paper have been separately updated by ISDA to include data from April and May 2022, which shows that despite recent crypto-asset market volatility, hedging remains highly effective.

Documents (1)for Crypto-asset Risks and Hedging Analysis

Source: ISDA

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