Collateral Requirements and Management

“Trustless” Full Collateralization

The Ithaca trading platform is based on counterparty-risk free on-chain settlement. Participants must provide full collateral funding for any orders they submit into the auction.

Typically, option buyers have to fully fund the limit price of an order for the potential premium that is to be paid in the case of a matched trade. Option sellers have to provide funds as collateral that match the maximum liability of the option that they are trying to sell.

The asset in which the collateral has to be provided depends on the exact contract for which an order is being submitted.

Similar to settled positions after a trade has been matched (please see section On-Chain Settlement for more details), collateral is being held for participants within an escrow like on-chain smart contract called FundLock.

Participants can access their funds and deposit funds into or withdraw funds from the FundLock smart contract at any time. Any deposit or withdrawal is an on-chain transaction.

The Ithaca matching engine will reject any new order or any updates to existing live orders if the funds required to cover the trade premium or the collateral are not available within the FundLock contract at the time of order submission or order update. If a participant withdraws funds from the FundLock smart contract that would render the orders below the level of required funds for all the outstanding live orders of the participant, the protocol will automatically cancel live orders until the available funds match the collateral and premium requirements of the remaining live orders.

When the Ithaca Matching Engine (IME) executes a trade, Option Contract buyers must pay the premium in USDC; Option Contract sellers receive that premium.

Option Contract sellers also have to provide the required Trade Collateral Amount in Collateral Currency for the Option Contract they sold. The Trade Collateral Amount is being locked up in a Smart Contract for the duration of the trade until the traded Contract is exercised.

The calculation of the Trade Collateral Amount follows the below set steps:

Step 1 - Calculation of the Collateral Amount

Collateral: Product Type

Vanilla Call Option: 1 Underlying Asset

Vanilla Put Option: Strike

Call Spread Option: Upper Strike minus Lower Strike

Put Spread Option: Upper Strike minus Lower Strike

Binary Call Option: 1 $

Binary Put Option: 1 $

Up-And-Out Call Option: 1 Underlying Asset

Up-And-In Call Option: 1 Underlying Asset

Down-And-In Put Option: Strike in $

Down-And-Out Put Option: Strike in $

Forward Contract Long: Traded Strike in $

Forward Contract Short: 1 Underlying Asset

Step 2 – Calculation of the Trade Collateral Amount

The Scaled Collateral Amount is calculated by multiplying the Collateral Amount with the size of the trade that was executed by the Option Contract seller

Collateral Optimization enables the above-mentioned collateral requirements to be determined on a portfolio basis, which results in lower overall collateral requirements because of the presence of offsetting or partially offsetting trades; instead of collateral being determined on a trade-by-trade basis, collateral required is based on the maximum loss in the user’s portfolio of Ithaca products as a whole.