Comment on page
Incentivized by CVA
(this is not yet implemented in SYMM v0.81)
Current implementations of OTC derivatives involve performing due diligence on counterparty solvency risks to ensure that the counterparty can continue a trade. There are instances when the agreed-upon collateral for the trade is used up and the counterparty is forced to close the trade. This can be an unfortunate situation for the trader if they wish to continue the trade and it is a result of outdated and manually intensive processes without counterparty diversification. Digital derivatives are able to solve this issue via automating and incentivizing the continuation of a defaulted trade with the remaining CVA of the defaulted trade.
When a trader defaults or wishes to terminate early, their positions can be bought by another party in exchange for a part of their CVA. When this transaction occurs, an independent party (drivers, watchdogs,oracles or MMs themselfs) verifies that the new party has enough maintenance margin to hold the position. This allows the non-defaulting party to avoid force-closing their position and, in some cases, their hedge. This primarily avoids liquidation events that can snowball into further liquidations.