Digital assets are moving into a phase of institutional integration into derivatives markets. Trading venues, custodial infrastructures and tokenization platforms now exist across both traditional financial markets and public blockchain networks. While this diversity has accelerated innovation and liquidity formation, it has also exposed structural constraints in settlement infrastructure and finality, capital treatment, collateral eligibility and operational resilience that limit scalable institutional participation.
This paper, which was developed by the ISDA Future Leaders in Derivatives 2025/2026 cohort, examines digital assets in derivatives markets and associated distributed ledger technologies through the lens of settlement design, prudential capital treatment and collateral management. Its central finding is that the institutional viability of digital assets depends on how exposures are structured, margined, settled and recognized within existing prudential frameworks.
The institutional significance of digital assets lies in how distributed settlement infrastructure alters the mechanics of derivatives markets. By changing the frequency of financial transaction settlement, collateral mobility and the length of time and degree to which mark-to-market exposures remain unsettled between counterparties, digital settlement infrastructure changes how derivatives exposures interact with existing prudential capital and liquidity frameworks. The resulting economic effect is that post-trade infrastructure determines the extent of balance sheet efficiency.
This paper demonstrates that faster settlement frequency and portfolio compression can reduce counterparty exposure and the associated valuation adjustment that is factored into the price of an over-the-counter derivatives contract to account for risks and costs beyond the pure market value (ie, x-value adjustment, or XVA) by approximately 40–45%, even when underlying market risk remains unchanged. These gains arise primarily from shorter exposure persistence and lower gross exposure metrics, rather than changes in volatility.
Digital assets have the potential to scale within existing regulatory regimes, but that opportunity requires appropriate settlement arrangements to preserve legal finality and collateral structures to support predictable liquidation mechanisms under stress. Digital asset exposures must also qualify for regulatory capital treatment that is commensurate with the risks of the underlying asset under prudential frameworks. The development of industry-wide standards, including ISDA documentation and the Common Domain Model, provides a credible foundation for interoperability across traditional and distributed market infrastructures. Extending these standards will allow digital assets to evolve without fragmenting legal certainty, risk management frameworks or supervisory alignment.
Click on the attached PDF to read the full report.
Documents (1) for Digital Assets and Derivatives: Where Next?
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