Counterparty risk is a major concern for crypto derivatives market following FTX collapse, finds report

Acuiti’s latest report found that nearly 50% of surveyed participants were concerned with counterparty risk, compared to 31% for operational risk, 13% for liquidity risk and only 6% for market risk.

Crypto derivatives market participants are holding less money at exchanges, onboarding with third-party custody providers and seeking increased regulation of crypto-native markets, according to Acuiti’s latest Crypto Derivatives Management Insight Report.

The report marks the first institutional study on the response to the collapse of FTX in November last year, and is based upon a quarterly survey of a group of over 70 senior executives from asset managers, hedge funds, sell-side firms and proprietary trading groups active in trading crypto derivatives.

Read more: Wild West in action: FTX’s fall from grace

Counterparty risk was highlighted as a key concern from surveyed participants, with 47% saying that they were concerned with this risk factor compared to 31% for operational risk, 13% for liquidity risk and only 6% for market risk.

More than three-quarters of surveyed participants were found to believe there would be a permanent separation of exchange and custody functions as investors look to reduce concentration risk. A similar figure predicted that there will be more stringent regulations in key jurisdictions, while about a third predicted consolidation among native crypto markets, a shift of liquidity to onshore regulated markets or a shift of trading to OTC markets.

Only 14% of surveyed participants thought that the collapse of FTX would result in significantly lower institutional participation in crypto markets, demonstrating the crypto industry’s ongoing resilience.

Looking at the most appropriate response to the FTX collapse, survey participants called for a significant increase in stringent regulation of crypto native exchanges as well as increased auditing requirements for exchanges.

Following the collapse of FTX, crypto derivatives exchanges published proof-of-reserves to help reassure investors of their client fund management processes. However, 64% of surveyed participants said they remained concerned with the quality of proof-of-reserves from most exchanges. No respondents were fully satisfied by most exchanges’ submissions, with only 14% fully satisfied by a small number of exchanges.

“The survey results are enlightening and encouraging for the growth of the crypto derivatives market. We’re pleased to help fuel this growth with our counterparty diligence offering,” said Doug Schwenk, chief executive of Digital Asset Research.  

The crypto derivatives community was also found to be increasing investment in risk management with nearly half of firms planning an investment in the next year. Acuiti stated that the findings suggested a move away from inhouse builds as the quality and sophistication of third-party software available to the market continued to increase. 

Elsewhere, Acuiti’s report found that a strong demand exists for a volatility index in crypto derivatives markets, a high level of optimism exists that there will be a recovery in digital assets markets over the next three months, and that firms are lowering maximum exchange exposures and diversifying exposures across exchanges following the collapse of FTX.

“This quarter’s report demonstrates the resilience of the crypto derivatives market as it recovers from an immensely challenging year. With every challenge the market has faced in its short existence, it has come back stronger and strengthened the foundations,” said Will Mitting, founder of Acuiti.

«