iv. Exchange Failure

Exchange Failure Risk

What happens in the event of a bankruptcy of an exchange?

CAMP’s custody solutions are structured such that beneficial ownership of backing assets never passes to custodians or exchanges. As a result, in the event of an exchange bankruptcy CAMP would very likely delegate these funds to another exchange to support the delta hedging of the overall backing. There may, however, be a delay in funds being made available in accordance with the custody solution provider’s policies. The protocol’s overall hedging positions would be automatically adjusted to account for this and rebalanced once the assets are freely available.

What happens if an exchange perpetual instrument misprices vs the market?

When a perpetual futures contract is mispriced, the data is excluded from pricing calculations. Given a single pricing feed is never relied upon in isolation and is constantly validated against multiple unique sources, the system is able to exclude a specific feed and to adjust operations internally immediately if an extreme outlier is detected.

Exchanges have a number of mechanisms to ensure perpetual instruments trade in line and fairly with the underlying index of the contract.

These include, but are not limited to:

1. A funding mechanism to encourage trading in line with the expected value of the contract.

2. Trading price bands to ensure the market doesn’t move too much within a space of time.

3. Mark price designs that ensure positions are appropriately marked & require fair margin levels.

As CAMP is positioned short on every market, in the event of a severe market dislocation where perpetual pricing is deeply below spot pricing, CAMP will have additional PnL to close versus the initial delta that was intended to be hedged.

Is there a legal opinion on whether user assets sit outside of bankruptcy estate?

Legal opinions and explanations are intended to be shared with the community in due course.

What happens to the derivative position on the exchange?

In these scenarios it is possible that unrealized PNL on the exchange would have to be settled directly with the exchange, which may result in additional delays or loss of funds. However, CAMP settles open hedging transactions on a periodic basis to mitigate this specific risk. If the unrealized position is a loss, funds may be deducted from the backing assets to settle the position with the exchange.

How frequently can PnL be settled from the exchange?

It’s case by case with each Exchange and OES provider, but generally CAMP looks to settle at a daily frequency or more often to mitigate risk & onchain transfer costs.

How do you ensure an exchange system error doesn’t liquidate the account?

CAMP has terms of service agreements with exchanges that govern the management and treatment of positions & margin on CAMP accounts.