Skip to content

Latest commit

 

History

History
34 lines (18 loc) · 2.71 KB

parametric-forwards.md

File metadata and controls

34 lines (18 loc) · 2.71 KB
Raw

Parametric Forwards

Forward Contracts with Embeded Volumetric Optionality and Programatic Execution

The 2015 revised interpretive guidance generally retains the first six elements of the seven-part test without significant changes. The Commissions slightly modified the fourth and fifth elements to clarify that its interpretation applies to both puts and calls, noting that the fourth and fifth elements do not prohibit “bandwidth contracts” from falling within the forward contract exclusion.

Forward EVOs - Discerning what qualifies under CFTC Guidance

Under the revised test, an agreement, contract or transaction with EVO may still qualify as a forward contract that is excluded from the swap definition if it meets the following criteria:

  1. The embedded optionality does not undermine the overall nature of the agreement, contract or transaction as a forward contract;

  2. The predominant feature of the agreement, contract or transaction is actual delivery;

  3. The embedded optionality cannot be severed and marketed separately from the overall agreement, contract or transaction in which it is embedded;

Mutual Assurance Gurantee Contract

Transaction Fee Premimum based on chance of default , how computed

Requirements

For a successful digital representation of the said features, we identify the following requirements:

  1. There is an infrastructure on which the contract terms are executed autonomously and in a trusted way. This may include the requirement that none of the counterparties is able to interfere with the infrastructure to alter the terms of contract.
  2. A trusted source provides market data for determination of the underlying derivative’s net present value and valuation is performed in a trusted, unique and predefined way. The valuation may be performed within the infrastructure executing the trade or provided to the infrastructure in a trusted way from an external source.
  3. The infrastructure has sole access to accounts (‘wallets’) owned by the contract (and not the counterparties) to execute the settlement based on the valuation. The counterparties can access the accounts to adjust the margin amounts only within a limited timeframe. They do not have access to their possible termination fees, which were deposited at trade inception.
  4. The infrastructure is enabled to terminate the contract according to the contract rules, transferring a possible termination fee from the party which causes the termination to the opposite counterparty’s wallet and finally opening the account for counterparty access.
  5. The infrastructure provides privacy in the form that only the counterparties and a possible trusted third party are able to see transaction amounts and account balances.