‘Smart’ derivatives can cure XVA headaches

Cryptocurrency technology could revolutionise derivatives valuation and collateralisation, say Massimo Morini and Robert Sams

Cryptocurrency technology may hold the key. Photo: Shutterstock

Imagine a derivatives contract that could value itself in real time, automatically calculate and perform margin payments, and even terminate itself in the event of a counterparty default. Though it sounds like science fiction, it may soon be a reality.

The technological advances behind cryptocurrencies such as bitcoin, which combine novel applications of cryptography with the computer science of consensus algorithms for distributed networks, can be used to create these ‘smart' derivatives,