Crypto Giant OKX Goes Live With Off-Exchange Derivatives Trading

OKX, the second largest cryptocurrency trading platform, is providing derivatives trading without the counterparty risk associated with assets being held on the exchange, enriching an existing partnership with asset manager CoinShares and custody joint venture Komainu.

Since FTX blew up last year, a number of players in the crypto space have devised ways to trade and settle off-exchange from the safe confines of a trusted custody setup.

Off-exchange settlement is relatively easily done for spot markets, said the head of hedge fund solutions at CoinShares, Lewis Fellas. A big differentiator, he said, is providing a similar arrangement when it comes to derivatives trading.

“We've taken a collateral mirroring agreement and embedded that so we can trade the full suite of OKX products in the derivatives platform,” said Fellas in an interview. “This is a lot more complicated, because you've got margin financing, you have to deal with risk mitigation on the downside, for instance; so if the client puts on a huge position and it goes down, how do you deal with collateral calls, etc.”

As well as rolling out Komainu custody-based derivatives trading with the main Coinshares entity, a gaggle of other hedge funds will be using the new system, Fellas said without naming the funds. The settlement system will also be expanded to other exchanges in due course, he said.

OKX began working with custody specialist Komainu, a joint venture between Japanese bank Nomura, CoinShares and crypto storage firm Ledger, back in June of this year.

As well as dealing with the complexity of derivatives and swaps from the trading perspective, the firms have also created a standardized legal agreement that can then be adopted by a multitude of counterparties, said Sebastian Widmann, head of strategy at Komainu.

“If spot settlement is 0.1 of this phase, I think now with derivatives, we have reached 0.2,” Widmann said in an interview. “We are trying to bring standards into the marketplace as more firms enter, especially institutional players who are accustomed to having custody and exchange segregated.”