INTRODUCTION Contributed by: Carl Kennedy, Daniel Davis, Stephen Morris, Matthew Kluchenek, Alexander Kim and Nicholas Gervasi, Katten Muchin Rosenman LLP
Tokenisation and stablecoins Blockchain and distributed ledger technologies have the potential to transform the infrastructure support - ing derivatives markets, particularly with collateral management. Tokenisation is the process of creat - ing digital representations of assets such as cash and securities on a blockchain, and offers a way to miti - gate operational difficulties and settlement delays in post-trade processes. In cleared derivatives markets, where participants must post both initial and variation margin to CCPs, the ability to move tokenised assets in near real time has the potential to reduce settle - ment times from days to minutes. Tokenised assets, such as stablecoins, can be transferred and recorded on-chain, which would increase liquidity and ease the burden of intraday margin calls for participants. Moreover, reduced settlement times allow for near instant collateral movement – a crucial step towards 24/7 derivatives trading and risk management. Perpetual futures Amidst ongoing efforts to classify perpetual deriva - tives as either swaps or futures contracts, particularly in the US, regulators are exploring their potential uses, benefits and risks. In contrast to traditional futures, perpetual futures do not have an expiration date and use a funding rate mechanism to keep them aligned with the spot price of the underlying asset. Moreover, traditional futures are price benchmarked near the expiration of the contract, whereas perpetual futures are price monitored and settled on an ongoing basis. New crypto-based perpetual futures have flourished across the globe. Resolving the classification issue in some jurisdic - tions will lead to clarity on the tax status, capital requirements, reporting, account structure and risk management of these products. As perpetual futures often allow for higher leverage, traders are exposed
to higher gains and losses as price fluctuations will amplify these positions. Other issues with perpetual futures include divergence from the actual value of the underlying asset, the need to maintain funding rate payments, and the risk of market manipulation, such as traders holding large positions open in an attempt to influence prices. Event contracts Event contracts are financial instruments that allow market participants to take positions on the out - comes of specific events, often allowing traders to buy “yes” or “no” positions, functioning as a mar - ketplace between traders. Popular examples include political event contracts such as which candidate will win in national presidential elections or sporting event contracts such as which country will win the World Cup. Their popularity has increased as investors look for new ways to hedge or speculate on news-driven outcomes and as digital platforms simplify access to markets. As a progression from interest rates, energy and weather contracts, political and sporting event contracts pose new questions surrounding what defines betting on elections or sports gaming or gam - bling. The continued proliferation of types and volume of event contracts will shape prediction and informa - tion markets and retail investor access to derivatives. Conclusion Derivatives have evolved significantly from their early origins and become integral to modern financial mar - kets. Despite their benefits in risk management, the complexity and potential risks of derivatives require ongoing regulatory oversight and prudent use by mar - ket participants. The future of derivatives will likely continue to be shaped by technological innovations, regulatory developments and the changing needs of the global economy.
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