How Does a De-Peg Event Affect the Margin Requirements for a Futures Contract?
When the stablecoin used for margin and settlement de-pegs below $1, the real value of the collateral held by the exchange decreases instantly. This effectively reduces the trader’s margin and increases the risk of under-collateralization.
The exchange may need to rapidly increase margin requirements or initiate forced liquidations to cover the now-insufficient margin value. This is a significant operational risk for the clearing house.
Glossar
Maintenance Margin
Collateral ⎊ Within cryptocurrency derivatives and options trading, the maintenance margin represents the minimum equity a trader must maintain in their account to cover potential losses.
Clearing House
Settlement ⎊ A clearing house, within cryptocurrency and derivatives markets, functions as an intermediary between buyers and sellers, mitigating counterparty risk through a process of novation ⎊ replacing original trade agreements with new ones directly with the clearing house.
Stablecoin
Instrument ⎊ Stablecoin refers to a class of cryptocurrency designed to maintain a stable market value, typically pegged to a fiat currency, which is essential for collateralizing margin accounts and settling cash-settled options in the derivatives market.
Initial Margin
Collateral ⎊ Initial margin represents the equity a trader must deposit with a broker or exchange as a good faith commitment to cover potential losses arising from derivative positions, notably within cryptocurrency markets.
Margin Requirements
Definition ⎊ Margin requirements refer to the minimum amount of capital an investor must deposit and maintain with a broker or exchange to open and sustain a leveraged position in derivatives trading.
Operational Risk
Framework ⎊ Operational risk within cryptocurrency, options trading, and financial derivatives transcends traditional financial definitions, demanding a framework that explicitly incorporates technological, regulatory, and idiosyncratic elements.