What problem is X-Margin solving and for who?
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 counterparties 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 or see your position. In effect, all users on X-Margin are verifiably ‘good for it’ based on their positions and cash balance, without needing to reveal either.
Why is X-Margin better than a central Clearing House?
- A central Clearing House becomes the central counterparty to all your trades. X-Margin allows users to trade with any counterparty, whilst ensuring they are sufficiently liquid at all times.
- A central Clearing House, as a result, is costlier to run and harder to scale across multiple venues and asset classes. X-Margin is cheap to run and scale across different asset classes and venues.
- A Clearing House requires you to post collateral with them. X-Margin allows you to keep your funds in your own bank account or custody solution
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 venues 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, approving any new asset class or instrument. Whilst getting the same efficiency, central clearing is less scalable and much more expensive to use. Moreover, its a regulatorily complex business to navigate.
How do you settle when profit and losses are netted across two counterparties?
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 day, ensuring the funds are locked away and then moved across.
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 calculate live margin usage. Margin usage will be available in real time, and positions will get closed/ cash settled based on bilaterally agreed liquidation rules when margin usage exceeds the threshold margin usage (80%, for example). 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.
Who would allow cross margin?
X-Margin is particularly useful to OTC (Over The Counter) traders who currently get no margin offset across counterparties and there no reliable way to settle trades.
We integrate with venues where users trade bilaterally (e.g. Paradigm) and allow them to reliably offset across each other.
We also have the ability to add exchanges. 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. We send alerts to users when they are increasing their margin usage, and also warnings to counterparties of traders who are close to being liquidated.
What happens if liquidations cannot be executed within the buffer that X-Margin has?
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, and simultaneously bilateral trades are cash settled.
Cash settled bilateral 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 buffer on X-Margin are extremely low. All trades executed on X-Margin are bilateral, but X-Margin sends live margin calculations to a private institutional grade database belonging to the trader. It allows any deficits or disputes about margin calculation to be solved bilaterally, as per the bilateral trade agreement and X-Margin User agreement.
Who is the eventual counterparty for each trade?
The counterparties to any user’s trades do not change. When trading on an exchange, the user’s counterparty is still the exchange, and when trading bilaterally, the user’s counterparty is still the OTC trading firm it traded with. X-Margin as the calculation agent, allowing both sides of the trade to give each other portfolio margin, but in a zero knowledge way so they don’t need to see each others overall position
Where does the collateral sit? Can I choose my own custodian?
A user’s collateral will sit with their own choice of custodian or wallet, provided:
- The custody solution is compatible with X-Margin. Currently Fireblocks and Etana Custody are integrated with X-Margin. We are soon integrating with Gemini Custody and Curv wallets (by the end of 2020)!
- All of the user’s counterparties and venues approve of it
If in the event one of the user’s counterparties disagrees with their custody solution, they will
- Either need to change the wallet provider to find one that is agreeable with all counterparties or
- Collateral with this new counterparty will sit separately with a different wallet and the user does not benefit from cross margin with the trades and funds sitting with the original wallet.