‘Smart’ derivatives can cure XVA headaches

Many traders would blame regulation or patchy collateralisation for the pricing add-ons that are making the swap market more complex. In fact, argue Massimo Morini of Banca IMI and Robert Sams of Clearmatics, the problem is outdated technology and the solution can be found in the world of cryptocurrencies

Cryptocurrency technology may hold the key. Photo: Shutterstock

Imagine a derivatives contract that could value itself in real time, automatically calculate and perform margin payments, and even terminate itself in the event of a counterparty default. Though it sounds like science fiction, it may soon be a reality.

The technological advances behind cryptocurrencies such as bitcoin, which combine novel applications of cryptography with the computer science of consensus algorithms for distributed networks, can be used to create these ‘smart' derivatives