What problem is X-Margin solving and for who?
Traders who have positions across multiple venues will often have offsetting positions. But without a clearing house to verify there is an offset, they usually post multiples of the collateral – once at each venue. This hugely capitally inefficient.
Trading firms have positions across multiple venues with often offsetting positions. But without a Clearing House to verify there is an offset, firms would need to put down new collateral at each venue. This hugely capital inefficient and limits the overall volume of trade. Moreover, trading firms currently need to deposit their collateral on exchange, opening them up to security concerns.
X-Margin allows users to cross margin across different counterparts and settles trades across those counterparts, much like a Clearing House. However unlike a Clearing House, it does so without needing to be a central counterparty.
X-Margin analyses all users’ positions (similar to a a central clearer) but calculates an efficient collateral requirement for each user, without seeing their positions. In effect, all users on X-Margin are verifiably ‘good for it’ based on their positions and cash balance, without needing to reveal either.
With X-Margin’s Custody Choice, it’s possible to choose from any of the approved custodians and keep funds with them, whilst still being able to trade on exchange.
Why is X-Margin better than a central Clearing House?
- A central Clearing House by definition requires the same Clearing House to be your central counterparty. X-Margin allows users to trade with any counterpart, whilst ensuring they are sufficiently liquid at all times.
- A central Clearing House is costlier to run and harder to scale across multiple venues. X-Margin is cheap to run and scale across different asset classes and venues.
- A Clearing House calculates margin every day, or every few hours, requiring there to be credit checks for users to ensure they can pay in the event of a negative shock to their position intra day. X-Margin prevents the need for ‘trust’ in your counterpart’s liquidity by constantly marking positions and monitoring margin usage.
Why do we need Zero Knowledge technology for Cross Margining?
Zero Knowledge technology ensures we can analyze each user’s positions and calculate the most efficient amount of collateral across all counterparts without being the central counterparty or needing users to reveal their positions (which would be a little like revealing your hand at poker).
Usually a central Clearing House would be the counterparty to all trades – checking through users’ trades and collateral posted to calculate margin usage on a daily basis. This is a slow and cumbersome process that has a greater degree of uncertainty since it’s not real time checking of risk.
How do you settle when profit and losses are netted across two counterparts/venues?
If Trader A has a trade with Trader B and an offsetting trade with Trader C, Trader A would get some degree of margin relief as their overall position is fairly neutral. However, if Trader A has lost money to Trader B but made money from Trader C, in effect money needs to flow from C to B.
X-Margin is continually assessing the net transfers required at the end of each trade, ensuring the funds are locked away and then moved across.
How does X-Margin ensure all my counterparties have enough collateral?
X-Margin always has (a) access to encrypted positions across venues and (b) visibility into how much collateral is sitting in the account. X-Margin thus has the ‘percentage margin used’ at all times. Provided this number is less than 100%, it means the counterpart is overcollateralized.
We never allow this ‘percentage margin used’ to exceed 80%, as a precaution. If at any point any counterpart is reaching 80% margin usage, we will inform you that your counterpart is using more margin than allowed and begin to close out some of their immediate risk to reduce this margin usage number.
With all the exchanges on X-Margin, we can share this ‘percentage margin usage’ as a live number, allowing them to monitor users who are likely to exceed margin usage.
For example, ‘User A’s Margin usage:’
What about credit risk for each entity on X-Margin?
Much like an exchange that constantly monitors your margin usage, X-Margin is able to monitor live positions, live mark prices and live margin usage. Margin usage will be available in real time, and positions will get closed when margin usage exceeds 80%. Credit risk only applies if the user could ever use more than 100% of their collateral for positions (i.e. margin usage > 100%), which X-Margin is designed to never allow. Much in the way credit risk is not a factor when margin trading on exchanges (e.g. Bitmex, Deribit, OKex), it is not a factor for X-Margin either.
Additionally, X-Margin works with partners to do thorough KYC and AML of it’s users to ensure all users are compliant with regulatory standards.
Who would allow cross margin?
X-Margin is particularly useful to OTC (Over The Counter) traders who currently get no margin offset across counterparts and no reliable way to settle trades.
We integrate with venues where users trade OTC (e.g. electronic platforms to execute OTC trades) and allow them to reliably offset amongst each other. X-Margin can effectively act as a Clearing House for OTC trades, without needing to be the Central Counterparty (CCP).
We also have the ability to add exchanges. Whilst it is not in the incentives to forgo control of funds, exchanges can get significantly more volume and liquidity on their platform in an increasingly competitive landscape. For example, OTC traders who want to hedge on exchange will be able to now get netting if an exchange signs up to this.
What happens if a user’s margin usage increases?
X-Margin is constantly monitoring margin usage to ensure it is sufficiently low, and charges a maintenance margin fee on margin used.
- We charge double maintenance margin when using >50% of the margin.
- When margin usage exceeds 70%, we will now charge four times the maintenance margin charge. We will also inform all counterparts of the increased margin usage by this user and the potential risk this user’s trades will be liquidated early. We let all counterparts know their projected margin usage if this event was to occur.
- Above 80% margin usage, if the user has not reduced risk or added more collateral within a fixed time window, positions will be liquidated (either by executing on exchange or Cash settled).
What happens if liquidations cannot be executed within the buffer that X-margin has? What is the collective insurance policy?
Above 80% margin usage, if the user has not reduced risk or added more collateral within a fixed time window, positions will be liquidated (either by executing on exchange or Cash settled). Exchange trades are closed first to allow the most room for cost of liquidation, followed by OTC trades that are cash settled.
Cash settled trades OTC trades on X-Margin have a live settlement price at all times, and as such, there is almost no slippage when closing out the trade.
Overall, the chances of liquidations not being executed within the 80%-100% buffer on X-Margin are extremely low. Even still, X-Margin will have two collective insurance policies:
- a) An insurance fund posted by X-Margin built using fees collected and
- b) A Catastrophe bond that will be purchased by X-Margin to cover against a black swan event.
Who is the eventual counterparty for each trade?
The counterparties to any user’s trades do not change. When trading with on an exchange, the user’s counterparty is still the exchange, and when trading bilaterally OTC, the user’s counterparty is still the OTC trading firm it traded with. X-Margin just ensures both sides of the trade are being margined appropriately.