How Does a Physically-Settled Contract Reduce the Risk of Rehypothecation?
A physically-settled contract, especially when held in a segregated account with a trusted custodian, reduces rehypothecation risk because the underlying asset is required for final delivery. The assets are typically kept separate from the broker's own funds and are earmarked for the contract's fulfillment, making it harder for the broker to reuse them.
Cash-settled contracts rely only on margin, which is more fungible and easier to rehypothecate.
Glossar
Underlying Asset Requirements
Requirement ⎊ Underlying Asset Requirements define the essential characteristics an asset must possess to serve as the reference for a crypto derivatives contract, ensuring the instrument is both financially viable and technically feasible.
Counterparty Risk Management
Exposure ⎊ Counterparty Risk Management within cryptocurrency, options, and derivatives necessitates quantifying potential losses stemming from the failure of an opposing party to fulfill contractual obligations.
Non Custodial Solutions
Control ⎊ Non-custodial solutions in cryptocurrency, options, and derivatives represent a paradigm shift towards user sovereignty over digital assets, fundamentally altering traditional financial intermediaries’ roles.
Rehypothecation Impact
Exposure ⎊ The rehypothecation impact within cryptocurrency derivatives, options trading, and broader financial derivatives stems from the practice where a custodian or lending platform reuses collateral posted by one client to secure obligations to another.
Collateral Rehypothecation Crypto
Leverage ⎊ Collateral rehypothecation within cryptocurrency contexts denotes the practice of an entity, typically a centralized exchange or lending platform, utilizing a client’s pledged crypto assets as collateral for its own borrowing or derivative positions.
Rehypothecation Concerns
Exposure ⎊ Concerns surrounding rehypothecation within cryptocurrency derivatives, options trading, and broader financial derivatives primarily stem from amplified counterparty risk.
Wrapped Asset Rehypothecation
Practice ⎊ Wrapped Asset Rehypothecation describes the financial practice where a tokenized representation of an underlying asset, such as Wrapped Bitcoin (WBTC), is pledged as collateral for a loan, and the lending institution subsequently reuses that collateral to back a separate loan or investment.
Rehypothecation Dangers
Exposure ⎊ This practice involves a custodian using client-posted collateral or assets to back its own trading positions or to meet obligations to other counterparties, significantly increasing systemic risk.
Financing through Rehypothecation
Collateral ⎊ Financing through rehypothecation, within cryptocurrency derivatives and options trading, fundamentally involves the reuse of posted collateral ⎊ typically digital assets or cash ⎊ to secure additional obligations.
Physically Settled Option
Settlement ⎊ A physically settled option is a derivative contract where, upon exercise or expiration, the underlying asset itself is exchanged between the buyer and the seller, rather than a cash equivalent.