Risk Disclosures
General
Digital Currency
Galaxy Digital Asset Derivatives Risk Disclosure Statement
THIS BRIEF STATEMENT COVERS SOME, BUT NOT ALL OF THE RISKS OF TRANSACTING IN DERIVATIVES CONTRACTS RELATING TO DIGITAL ASSETS WITH GALAXY DIGITAL, INCLUSIVE OF ITS AFFILIATED ENTITIES (COLLECTIVELY, GALAXY DIGITAL). BY ENTERING INTO SUCH TRANSACTIONS WITH GALAXY DIGITAL, YOU REPRESENT AND WARRANT THAT YOU ARE CAPABLE OF EVALUATING, AND HAVE EVALUATED, THE MERITS AND RISKS OF TRADING SUCH CONTRACTS WITH GALAXY DIGITAL AND HAVE DETERMINED THAT SUCH CONTRACTS ARE APPROPRIATE FOR YOU AND THAT YOU ARE CAPABLE OF ASSUMING, AND ARE PREPARED TO ASSUME, THE RISKS ASSOCIATED WITH SUCH CONTRACTS.
TRADING DERIVATIVES CONTRACTS RELATING TO DIGITAL ASSETS AND TRADING WITH GALAXY DIGITAL IS NOT SUITABLE FOR EVERYONE AND CAN RESULT IN LOSSES UP TO, AND IN SOME CIRCUMSTANCES ABOVE, THE ENTIRE AMOUNT YOU INVEST. YOU SHOULD ONLY ENTER INTO SUCH TRANSACTIONS AFTER YOU ARE CERTAIN THAT YOU FULLY UNDERSTAND THE RISKS ASSOCIATED WITH DOING SO.
Please also refer to the link here, for the ISDA General Disclosure Statement for Transactions and the ISDA Disclosure Annex for Commodity Derivative Transactions, which this Disclosure Statement supplements. If you cannot access this link, please reach out to sdonboarding@galaxy.com
Risk Disclosures for Derivatives that Provide Exposure to or Reference Digital Assets
High Volatility, Speculation, Low Liquidity and High Market Concentration
Derivatives that provide exposure to digital assets[1] may trade at a value other than that which may be inferred from current values of the underlier due to factors including, but not limited to, high volatility, low liquidity and high market concentration in the underlier, as well as the fact that there may be significant variations in publicly available pricing sources.
The prices for many digital assets are highly volatile and can fluctuate significantly in short periods of time, sometimes even absent the occurrence of the types of economic events that normally precipitate price changes for other types of assets. Depending on how quickly prices change, you might not be able to terminate or hedge your digital asset-referencing transactions before you suffer significant losses. The absence of industry standard terms for digital asset and digital asset derivatives transactions can also increase this risk. Another source of volatility for digital asset prices is the high degree of digital asset demand that is generated by speculators and investors seeking to profit from the short- or long-term holding of digital assets. Such speculators and investors losing interest in digital assets could reduce liquidity and increase volatility and ultimately make it difficult to accurately value digital assets.
Liquidity (and relative liquidity) is another source of potential volatility for digital asset prices. The overall size of many digital asset markets can be significantly smaller than markets for other types of assets, which can limit liquidity and increase volatility. In addition, liquidity in digital asset markets can change quickly. Because the market forces that determine digital asset prices are not entirely clear, it is difficult to predict what market factors can lead to substantially more or less liquidity in digital asset markets. Digital assets trade across different exchanges and in varied jurisdictions, so local and regional events can affect the liquidity, prices and volatility of digital assets in unexpected ways. Liquidity can also be adversely affected by regulatory changes, the development of updated or new technologies, market standard terms and new digital assets and the migration of trading interest to such new digital assets or away from existing technologies and market standard terms. You should monitor liquidity developments in digital assets carefully.
The liquidity of digital assets and the volatility of digital asset prices also depend on the concentration of owners of a digital asset or the traders in such digital assets. There is little transparency in the ownership of or trading interest in most digital assets, nor are there generally limits on concentrated ownership or trading interest. Ownership of or trading in particular digital assets can be concentrated in a limited number of countries or regions and may be controlled by a small number persons or entities. Events in such countries and regions, or events that affect such persons or entities, could have a disproportionate impact on the prices of digital assets. Greater concentration in ownership or trading interest can also lead to heightened volatility due to sharp swings in the level of supply or demand. High levels of concentration can also make a market susceptible to manipulation or distortion.
Volatility, liquidity and concentration risk with respect to digital assets may ultimately affect the terms of derivatives contracts that reference digital assets. High volatility or low liquidity could, for example, lead to difficulties in ascertaining the correct valuation for a digital asset, which could in turn pose challenges with respect to payment, delivery and collateral obligations, among others, under a related derivatives contract since these obligations rely upon the value of the underlying digital asset.
Malicious Actors
Mining is the act of using a computer to run computations designed to help build the next block (a set of records of digital asset transactions) on the distributed ledger where digital transfers are recorded. A material concentration in processing power dedicated to mining on a digital asset network can also increase the risk of a malicious actor or botnet, i.e., a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers, obtaining a majority of the processing power dedicated to mining on any given digital asset network, in which case it may be able to alter the distributed ledger by constructing fraudulent blocks or preventing certain transactions from completing in a timely manner, or at all. The malicious actor or botnet could control, exclude or modify the ordering of transactions. Such activity by the malicious actor or botnet could have significant effects on the liquidity and price of the digital asset. Such acts could also affect digital asset derivatives by disrupting markets in the underlying digital asset and introducing uncertainty as to the price or other characteristics of the digital asset.
Lack of Trading History
The markets for digital assets and derivatives that reference digital assets are relatively new. Accordingly, there do not exist long histories of pricing information for digital assets, and the market forces that determine the prices for digital assets continue to evolve. This risk is heightened for newer digital assets and the derivatives that reference them, as these are less developed markets with shorter trading histories. The evolution of these market factors can lead to significant changes to market trading behavior and digital asset prices and can in turn affect the terms of derivatives contracts that reference digital assets.
The Effect of Investor Preferences
The growth of the digital asset industry is subject to a high degree of uncertainty. Changes in investor demographics and public tastes and preferences over time can affect the further development of this industry, which in turn could move the price of digital assets in unexpected and unpredictable directions.
Such changes in public tastes and preferences could be in response to, among other factors, the failure to maintain and update digital asset software and technology and a growing perception that the use and holding of digital assets is no longer safe and secure, regardless of whether such perception is true. The open-source nature of digital asset networks means that contributors are not generally directly compensated for their contributions in maintaining and updating the digital asset software and technology. Consequently, there is a lack of financial incentive for developers to maintain or develop the networks or adequately address issues that may emerge over time. A failure to do so can negatively impact investor preferences for digital assets and consequently the prices of the relevant digital assets.
Further, social media, the news and other publicity can affect investor perception of digital assets and digital asset market intermediaries, regardless of whether such stories or claims are true. In particular, in circumstances where the digital asset is issued or sponsored by a single team or company, negative press of the team or issuing or sponsoring company could adversely impact the price of that digital asset.
Changing public perception with respect to digital assets could very well affect the terms of derivatives contracts that reference digital assets. By way of example, negative press that leads to public discontent with a particular digital asset (or, for that matter, digital assets more broadly) could dramatically affect the value of derivatives contracts which rely upon the value of an underlying digital asset, regardless of whether such negative press is true.
Lack of Regulation; Possibility of Government Intervention
The regulation of “cash “or “spot” markets for most digital assets, as well as derivatives referencing digital assets, is relatively new and evolving compared to the regulation of most traditional financial products, and in some cases, such digital assets and derivatives may be largely unregulated or less regulated than comparable traditional financial products. In particular, depending on their location, these markets and the participants therein may not be subject to market integrity or transparency rules, and participants in these markets may not be subject to registration, licensing or fitness requirements, business continuation, disaster recovery or cybersecurity requirements, or know your customer and anti-money laundering rules. This lack of regulation can make digital asset markets susceptible to manipulation or distortion, which may adversely affect your digital asset transactions and your derivatives contracts that reference digital assets. This is particularly the case to the extent that the digital asset derivatives we enter into with you reference digital assets or related derivatives that trade in unregulated markets, which are used, for example, to establish one or more settlement prices or in connection with disruption or similar events.
Digital asset trading has also been associated with illegal activity, including drug dealing, money laundering and other forms of illegal commerce. Law enforcement may respond to such actions by limiting or shutting down trading venues or participation on such venues.
Digital assets currently face an uncertain and changing regulatory landscape in the U.S. and many foreign jurisdictions. In the U.S., for example, certain digital assets may qualify as securities regulated by the U.S. Securities and Exchange Commission (“SEC”) or commodities within the jurisdiction of the Commodity Futures Trading Commission (“CFTC”) depending on the digital asset, and it is often unclear whether a particular digital asset is a security. Similarly, most derivatives referencing such digital assets are regulated by the SEC and/or CFTC and are subject to rules and regulations that may change as the marketplace and the regulators overseeing them evolve. The CFTC and/or SEC may promulgate new rules or amend existing rules impacting digital asset derivatives, and other federal regulators, including for example, the Board of Governors of the Federal Reserve System, may also impose new regulations on entities and individuals that participate in the digital asset derivatives ecosystem. The effect of such rule changes, or proposed rule changes, is highly uncertain and could negatively impact the terms, value or even the legality of certain digital asset derivatives. Additionally, the derivatives contract may not account for disruptions or changes caused by proposed or effectuated rule changes in the United States or other jurisdictions. Digital assets and their derivatives also may be regulated by one or more state regulatory bodies, as well as self-regulatory organizations. In addition, regulatory authorities in the United States and other jurisdictions generally have significant discretion to interpret and enforce existing statutes and regulations that are or may be applicable to digital assets and digital asset derivatives, and any changes in interpretations and enforcement practices could have a material adverse effect on the value of digitals assets and digital asset derivatives.
Certain non-U.S. jurisdictions have imposed stringent regulatory controls on digital asset transactions, greatly limiting liquidity in those jurisdictions. Other jurisdictions may, in the future, impose similar controls, or significant taxes or other requirements that greatly restrict participation in digital asset markets and funding markets, either in general or based on the nature of specific participants or transactions. All of these actions can significantly affect liquidity, volatility and prices for digital assets and derivatives contracts which rely on the value of an underlying digital asset.
Intellectual Property Claims
Third parties may assert intellectual property claims relating to the operation of a digital asset exchange or network and the source code relating to the holding and transfer of digital assets. Regardless of the merit of any intellectual property or other legal action, any threatened action could reduce the confidence in the long-term viability of digital asset networks or adversely affect prices for digital assets and their related derivatives.
Trading Hours May Not Align
The market for many digital assets operates on a global, twenty-four hour basis. Therefore, your and our hours of operation, during which you and we may transact in and value digital asset derivatives transactions, calculate margin and settlement amounts, issue margin calls and settle collateral delivery or return amounts, may not conform to the hours during which the underlying digital assets are most traded or align to market hours associated with more traditional financial products. To the extent this occurs, significant changes in digital asset prices as well as market, economic and political conditions due to reasons beyond our control, and thus the value of digital asset transactions and the amount of credit exposure they create between us, may take place during times when it may be difficult for you to monitor or react to them.
Digital asset markets that operate continuously may also impact digital asset derivative transactions. For example, derivatives transactions typically rely upon the underlying asset market having conventional times during which valuations are established, such as an official closing price at the end of a business day. This concept would not apply to digital asset markets that operate on a twenty-four hour basis. Furthermore, while some digital asset trading venues may publish prices at a certain time or across a certain period, these times or windows are typically not intrinsically tied to any circumstances regarding underlying market activity (such as the availability of trading or trading volume). This may lead to uncertainty as to how and when valuation of a digital asset will be ascertained for purposes of a digital asset derivative.
Forks
It is possible that planned, unplanned, sudden, scheduled, expected, unexpected, publicized, not well-known, consensual, and/or controversial changes to the underlying operating rules of certain digital assets may occur from time to time in such a way as to result in the creation of one or more related versions of an existing digital asset (each instance of any such change, a “Fork”). Forks may result in multiple versions of a digital asset and could lead to the dominance of one or more such versions of a digital asset and the partial or total abandonment or loss of value of any other versions of such digital assets.
A fork could fundamentally alter the nature or functionality of the digital asset, which could in turn affect the terms of a derivatives contract that reference that digital asset. Depending on its terms, the derivatives contract may not account at all for Forks or the potential existence of multiple versions of the digital asset underlier, may provide discretion for one of the parties to determine how to address the potential impact of a Fork (including adjustments to payment and settlement terms), or may permit or require early termination of the transaction upon the occurrence of a Fork, all of which could affect the economic terms of the transaction or result in disputes.
Airdrops
An airdrop involves the unilateral issuance of a new digital asset to the holders of an associated digital asset. An airdrop could affect the value of the digital asset in unknown ways, which in turn may impact the terms of a related digital asset derivative. Depending on its terms, the derivatives contract may not account at all for airdrops, may provide discretion for one of the parties to determine how to address the potential impact of an airdrop (including adjustments to payment and settlement terms), or may permit or require early termination of the transaction upon the occurrence of an airdrop, all of which could affect the economic terms of the transaction or result in disputes.
Delisting
Digital assets or related futures or options may be delisted from a trading platform suddenly and for any reason or no reason whatsoever, including, without limitation, changes in applicable law or regulation or by court order. Delisting could make it difficult or impossible to liquidate your positions in derivatives contracts that reference the delisted digital asset, future, or option and could ultimately result in a complete loss of value. Depending on its terms, the derivatives contract may not account at all for delistings, may provide discretion for one of the parties to determine how to address the potential impact of a delisting (including adjustments to payment and settlement terms), or may permit or require early termination of the transaction upon the occurrence of a delisting, all of which could affect the economic terms of the transaction or result in disputes.
Risk of Market Disruption
In addition to those mentioned above, several other events or factors can result in disruption of digital asset markets and the derivatives contracts that reference them, including:
Commencement of insolvency proceedings in respect of intermediaries in the digital asset and digital asset derivatives markets, including but not limited to, issuers of digital assets, exchanges, custodians, clearinghouses, brokers or dealers;
Temporary or permanent suspensions or limitations on trading in digital assets or related derivatives, including the triggering of limits on the amount of price fluctuation, an unscheduled market close, or, as noted above, intervention by a government authority;
Developments in regulation or taxation of digital assets or related derivatives or securities, including heightened enforcement activity or the imposition of limits on owning or trading in digital assets or related derivatives or securities; and
Changes in a digital asset’s underlying technology protocols (such as a Fork in the distributed ledger used by a digital asset), initiation or discontinuation of use or support by a significant merchant, investor or other market participant, exchange or other intermediary, or a migration of developers or miners away from certain platforms.
In addition, cyberattacks, theft, fraud or other operational losses at exchanges, wallet providers or other platforms or market intermediaries also pose a significant risk of disruption of digital assets markets and their related derivatives. Particularly, the cybersecurity risks of digital assets and related “wallets” or spot exchanges include hacking vulnerabilities and a risk that publicly distributed ledgers may not be immutable. A cybersecurity event, such as a coordinated attack on one or more digital asset exchanges or other market intermediaries, could result in a substantial, immediate and irreversible loss for market participants that trade in digital assets and the derivatives contracts that reference them. Similarly, it is possible that the holder of a digital asset could lose access to the platform or infrastructure through which it holds the digital asset as the result of the loss or theft of the private key relating to that digital asset. In many cases, the private key would not be recoverable, thus potentially resulting in a permanent inability to deal in the relevant digital asset and a dramatic impact on the liquidity and value of any derivatives contract that references the unrecoverable digital asset. Even a minor cybersecurity event in a digital asset is likely to result in downward price movement on that product and may also potentially impact other digital assets and their related derivatives. The viability of any digital asset derivative generally depends upon an accurate and immutable ledger recording digital asset transfers, as well as the safe and sound operation of digital asset platforms and infrastructure.
Depending on its terms, the derivatives contract may not account at all for these sorts of disruptions, may provide discretion for one of the parties to determine how to address the potential impact of a disruption (including adjustments to payment and settlement terms), or may permit or require early termination of the transaction upon the occurrence of a disruption, all of which could affect the economic terms of the transaction or result in disputes.
Transaction Fees
Many digital assets allow market participants to offer miners (i.e., parties that process transactions and record them on a blockchain or distributed ledger) a fee. While not mandatory, a fee is generally necessary to ensure that a transaction is promptly recorded on a blockchain or distributed ledger. The amounts of these fees are subject to market forces, and it is possible that the fees could increase substantially during a period of stress, which could in turn affect the value of derivatives that reference these digital assets.
Derivatives
Dodd-Frank Swap Dealer Disclosures And Notifications
Disclosures are provided in anticipation of Galaxy Derivatives LLC (“GDeriv LLC” or “Swap Dealer”) pending approval as a swap dealer with the U.S. Commodity Futures Trading Commission and National Futures Association.
1. INTRODUCTION
The Commodity Exchange Act (“CEA”) and Commodity Futures Trading Commission (“CFTC”) rules, pursuant to Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), impose comprehensive regulatory requirements on swap dealers. These requirements mandate that GDeriv LLC provides disclosures and notifications (“Disclosures”) in relation to the CFTC-regulated swaps (“Swaps”) that it enters into with certain of its counterparties or may enter into with its prospective counterparties. This page is intended to address these obligations. Any Disclosures provided here should be read in conjunction with any transaction or counterparty-specific agreements that GDeriv LLC may execute with you.
2. DEFINITIONS
A. “Business Day” means a day on which commercial banks are open for general business (including dealings in foreign exchange and foreign currency deposits).
B. “CEA” means the U.S. Commodity Exchange Act.
C. “CFTC” means the U.S. Commodity Futures Trading Commission.
D. “CFTC Regulations” means the rules, regulations, orders and interpretations published or issued by the CFTC.
E. “DCO” means a “derivatives clearing organization” as such term is defined in Section 1a(15) of the CEA and the CFTC Regulations.
F. “DF” means the Dodd-Frank Act.
G. “Disclosures” has the means the disclosures and notifications set forth in this document.
H. “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
I. “Exchange Act” means the Securities Exchange Act of 1934.
J. “FCM” means a futures commission merchant subject to regulation under the CEA.
K. “Interpretive Guidance” means the Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 45292 (July 26, 2013), as amended or supplemented by the CFTC from time to time.
L. “SEC” means the Securities Exchange Commission.
M. “Swap” means a “swap” as defined in Section 1a(47) of the CEA and CFTC Regulation 1.3. The term “Swap” also includes any foreign exchange swaps and foreign exchange forwards that may be exempted from regulation as “swaps” by the U. S. Secretary of the Treasury pursuant to authority granted by Section 1a(47)(E) of the CEA.
N. “Swap Communication Event” means, with respect to you and Swap Dealer, each (1) Swap Transaction Event, (2) offer to enter into a Swap Transaction Event, and (3) “recommendation” (as such term is used in CFTC Regulation 23.434 and 23.440) with respect to a Swap or trading strategy involving a Swap.
O. “Swap Transaction Event” means, with respect to you and the Swap Dealer, the execution of a new Swap or any material amendment, mutual or unwind novation of an existing Swap.
3. EXTERNAL BUSINESS CONDUCT DISCLOSURES
CFTC Regulation 23.431(a) requires that GDeriv LLC provide its counterparties (other than a counterparty that is a swap dealer, major swap participant, security-based swap dealer, or major security-based swap participant) with material information at reasonably sufficient time prior to entering into the Swap that allows these counterparties to assess the material:
Risks of the Swap, which may include market, credit, liquidity, foreign currency, legal, operational, and any other applicable risks;
Characteristics of the Swap, including the Swap’s material economic terms (“METs”), the terms relating to the Swap’s operation, and the rights and obligations of the parties during the term of the Swap; and
Incentives and conflicts of interest that GDeriv LLC may have in connection with the execution of the Swap.
A. Material Risk Disclosures
The International Swaps and Derivatives Association, Inc. (“ISDA”) has created the ISDA General Disclosure Statement for Transactions and related Annex/documentation relating to specific derivative product types to support swap dealers, like GDeriv LLC, in addressing their Disclosure obligations. These documents describe (i) material characteristics of a variety of transactions related to certain underlying referenced assets; (ii) material risks of such transactions and (iii) material incentives and conflicts of interest that might exist when entering into a Swap transaction with GDeriv LLC. For access to the ISDA General Disclosure Statement for Transactions and related Annex/documentation, please login here. If you cannot access this link, please reach out to sdonboarding@galaxy.com.
B. Material Characteristics
Information related to material characteristics of the Swap, including standard material economic terms (“MET”), can be found here. If you cannot access this link please reach out to sdonboarding@galaxy.com. Transaction-specific METs will be provided prior to execution by GDeriv LLC and made available via confirmation or other transaction-level agreements.
C. Material Conflicts of Interest
Some material conflicts of interest may arise between you and Swap Dealer where Swap Dealer performs services for you with respect to futures, options on futures, swaps (as defined in the CEA), forwards or other commodity derivatives, (collectively with services performed by Swap Dealer, “Contracts”).
In particular, these conflicts of interests can arise when Swap Dealer has an economic or other incentive to act, or persuade you to act, in a way that favors Swap Dealer, or its respective affiliates. Fundamental conflicts of interest are inherent in every Contract because a positive performance for one party will be a negative performance for the other party. Because of this unavoidable conflict of interest, communications from us in respect of Contracts are not, should not be treated or relied upon as, or considered by you to be, investment advice or an offer, inducement, recommendation, suggestion or call for you to enter into a Contract.
Trading Facility Section
Under applicable law, including regulations of the CFTC, not all Swaps are required to be executed on an exchange, a swap execution facility, execution facility (each, a “Trading Facility”), even if a Trading Facility lists the Swap as applicable, for trading. In such circumstances, it may be financially advantageous for Swap Dealer, or its respective affiliate to execute a Swap with you bilaterally in the over-the-counter market rather than on a Trading Facility and, to the extent permitted by applicable law, we may have an incentive to persuade you to execute your Swap bilaterally.
Clearing House Selection
Applicable law may permit you to choose the CFTC-registered DCO to which you submit a Swap for clearing. You should be aware that Swap Dealer may not be a member of, or may not otherwise be able to submit your Swap to, the DCO of your choice. Consequently, Swap Dealer, as applicable, may have an incentive to persuade you to use a DCO or clearing agency of which it or its affiliate is a member and where Swap Dealer as applicable would face lower clearing costs, and may decline to enter into a Contract with you to the extent you choose another DCO.
Ownership Interest
You also should be aware that Swap Dealer, or an affiliate, may own stock in, or have some other form of ownership interest in, one or more U.S. or foreign Trading Facilities or DCOs where your Contracts may be executed and/or cleared. As a result, Swap Dealer or a respective affiliate may receive financial or other benefits related to its ownership interest when Contracts are executed on a given Trading Facility or cleared through a given DCO or clearing agency, and Swap Dealer would, in such circumstances, have an incentive to cause applicable Contracts to be executed on that Trading Facility or cleared by that DCO or clearing agency. In addition, directors, officers and employees of Swap Dealer or an affiliate may also serve on the board of directors or on one or more committees of a Trading Facility, DCO, or clearing agency.
Other Financial Incentives
In addition, Trading Facilities, DCOs, and clearing agencies may from time to time have in place other arrangements that provide their members or participants with volume, market-making or other discounts or credits, may call for members or participants to pre-pay fees based on volume thresholds, or may provide other incentives or arrangements that are intended to encourage market participants to trade on, or direct trades to, that Trading Facility, DCO, or clearing agency. Swap Dealer, or an affiliate, may participate in and obtain financial benefits from such incentive programs.
Other Conflicts of Interest
When Swap Dealer provides execution services to you (either in conjunction with clearing services or in an execution-only capacity), Swap Dealer may direct orders to affiliated or unaffiliated market-makers, other executing firms, individual brokers or brokerage groups for execution. When such affiliated or unaffiliated parties are used, they may, where permitted, agree to price concessions, volume discounts or refunds, rebates or similar payments in return for receiving such business. Likewise, where permitted by law and the rules of the applicable Trading Facility, Swap Dealer, or an affiliate of these, may solicit a counterparty to trade opposite your order or enter into transactions for its own account or the account of other counterparties that may, at times, be adverse to your interests in a Contract. In such circumstances, that counterparty may make payments and/or pay a commission to Swap Dealer, or an affiliate of these, in connection with that transaction. The results of your transactions may differ significantly from the results achieved by Swap Dealer for its own account, its affiliates, or for other customers.
In addition, where permitted by applicable law (including, where applicable, the rules of the applicable Trading Facility), Swap Dealer, and either of its directors, officers, employees or affiliates may act on the other side of your order or transaction by the purchase or sale for an account, or the execution of a transaction with a counterparty, in which Swap Dealer, or a person affiliated has a direct or indirect interest, or may affect any such order with a counterparty that provides Swap Dealer, or its respective affiliates with discounts related to fees for Contracts or other products. In cases where Swap Dealer has offered you a discounted commission or clearing fee for the applicable Contract executed through it as agent or with it or its affiliate acting as counterparty, Swap Dealer or its affiliates may be doing so because of the enhanced profit potential resulting from acting as executing broker or counterparty.
Swap Dealer, or its respective affiliates may act as, among other things, an investor, research provider, placement agent, underwriter, distributor, remarketing agent, structurer, securitizer, lender, investment manager, investment adviser, commodity trading advisor, commodity pool operator, market maker, or proprietary or other trader. In those and other capacities, Swap Dealer, or its respective directors, officers, employees and affiliates may take or hold positions in, or advise other customers and counterparties concerning, or publish research or express a view with respect to, a Contract or a related financial instrument that may be the subject of advice from Swap Dealer or its affiliates to you. Any such positions and other advice may not be consistent with, or may be contrary to, your interests or to positions that are the subject of advice previously provided by Swap Dealer, or its respective affiliate to you, and unless otherwise disclosed in writing, Swap Dealer, or its respective affiliates are not necessarily acting in your best interest and are not assessing the suitability for you of any Contract. Swap Dealer, or its respective affiliates may also facilitate the activities of other counterparties, or hedge transactions it has entered into with other counterparties, which transactions may have adverse effects on the value of the assets underlying any Swap entered into between you and Swap Dealer, entered into between. Acting in one or more of the capacities noted above may give Swap Dealer or its respective affiliates access to information relating to markets, investments and products. As a result, Swap Dealer, or any of its affiliates may be in possession of information which, if known to you, might cause you to seek to dispose of, retain or increase your position in one or more Contracts or other financial instruments. Swap Dealer, and its affiliates will be under no duty to make any such information available to you, except to the extent we have agreed in writing or as may be required under applicable law.
D. Pre-Trade Mid-Market Mark Methodology
As part of its obligations to disclose material incentives and conflicts of interest, GDeriv LLC is required to provide counterparties (other than swap dealers, major swap participants, security-based swap dealers and major security-based swap participants) with a pre-trade mid-market mark (“PTMMM”) and the methodology and assumptions used to prepare the PTMMM. The PTMMM is generally calculated using the same methodology and is subject to the same limitations as for daily marks discussed in greater detail below. The PTMMM does not include amounts for profit, credit reserve, hedging, funding, liquidity, or any other costs or adjustments. Please note that any PTMMM GDeriv LLC provides to you may not necessarily, and would often be expected not to be, a price at which either we or you would agree to enter into or terminate a Swap. You should not regard any PTMMM that GDeriv LLC provides to be an offer to enter into or terminate the relevant Swap at that value or price. Furthermore, any margin calls related to Swaps may be based on considerations other than PTMMM, and the PTMMM may not be the value of the swap that is marked on GDeriv LLC’s books. For liquid products, you should regard the mid of bid and offer as our PTMMM. For less liquid products, GDeriv LLC’s consider historical realized volatilities related to the underlier and/or data related to more liquid coins in its PTMMM modeling methodology.
As the PTMMM does not include amounts for profit, credit reserves, hedging, funding, liquidity and other relevant costs, reserves and adjustments, it is highly likely to differ from the price at which GDeriv LLC is willing to enter into the relevant proposed Swap. That difference is not indicative of the profit, if any, that GDeriv LLC will realize from the relevant proposed Swap, which will be dependent on a number of variables including, without limitation, price volatility, market liquidity and relevant hedging activity, if any, by GDeriv LLC. Each PTMMM is provided solely for the information of the counterparty to the Swap and is not intended for the benefit of any other party. Unless otherwise indicated, all PTMMMs are provided in the same currency as the live trading price quoted to you by GDeriv LLC.
Given certain variables a Swap’s value may not be evident in the market and is therefore subjective. Any PTMMM we provide to you is time-sensitive and only current as of the time at which it is provided to you. Accordingly, GDeriv LLC’s PTMMM can significantly differ from other market participants. No PTMMM is provided in respect of any Swap transaction with a GDeriv LLC affiliate that is not a Swap Dealer or in respect of any derivative transaction that is not regulated by the CFTC. The PTMMM is not intended as a valuation or appraisal of the Swap and Swap Dealer does not assert that it is an appropriate basis for valuing the Swap in your financial statements, for tax reporting purposes or otherwise. You should consult with your own auditors and other advisors before relying on or making use of the PTMMM for any purpose. Swap Dealer is not acting as your advisor, agent or fiduciary in providing the PTMMM.
The PTMMM is provided free of charge and without restrictions on your internal use. The daily mark has been prepared for your use only and you should treat it as proprietary and confidential information. This information may not be shared or reproduced in whole or in part under any circumstances. This information applies to any PTMMM delivered to you orally or in written or electronic format.
E. Scenario Analyses
With respect to each Swap between you and Swap Dealer that is not “available for trading” (as that phrase is defined in CFTC Regulations), you may request, and consult on the design of, a scenario analysis to allow you to assess your potential exposure in connection with such Swap pursuant to in accordance with CFTC Regulation 23.431(b).
F. Daily Marks
In accordance with CFTC Regulation 23.431(d)(2), GDeriv LLC is required to provide daily marks (“daily mark”) to its counterparties (other than swap dealers, major swap participants, security-based swap dealers and major security-based swap participants) with respect to uncleared Swaps.
In general, the daily mark is based on a theoretical calculation of the net present value of known and assumed future payments under the Swap. For certain non-standard or bespoke Swaps, the daily mark may be estimated based on the trader’s view of the prevailing market for the Swap. To the extent practicable, the trader’s judgment will take into account observable market factors, such as bid and offer quotes (if available), trading inquiries and execution prices for similar transactions, market liquidity for the relevant Swap and macroeconomic events affecting the market, with appropriate adjustments to reflect changes in the market since the time of such quotes or transactions, differences in size or terms between the proposed Swap and the Swaps reflected in such pricing inputs and other factors deemed relevant by the trader. The trader may also consider the output of pricing models used for comparable products. The daily mark for options on digital assets is computed by a pricing model that uses a volatility surface calibrated to market prices of options as observed on one or more exchanges. For option contracts based on underliers that do not have sufficiently observable markets, the calculation of the daily mark considers historical realized volatilities related to the underlier and/or data related to more liquid coins. For Non-deliverable Forwards, the daily mark is based on determinant pricing. For other types of Swaps, GDeriv LLC in its sole discretion, may use different methodologies to calculate the daily mark, including but not limited to Monte Carlo simulations, Black-Scholes Model, or other pricing models. Swap Dealer’s pricing models may differ from pricing models used by other dealers and may also be based on assumptions and inputs that differ from those used in other dealers’ pricing models. Such variations may be greater for illiquid or complex products since the future performance of such products is generally more difficult to model. The daily mark may therefore differ significantly from the daily mark that would be provided by another dealer for a similar transaction.
For cleared Swaps originally executed between you and Swap Dealer, counterparties (other than swap dealers, major swap participants, security-based swap dealers and major security-based swap participants) have the right, upon request, to receive a daily mark from the futures commission merchant through which you clear such cleared Swap or the relevant derivatives clearing organization (“DCO”) or another third party in accordance with the CFTC Regulation 23.431(d)(1). Such daily mark may be provided directly by GDeriv LLC or through a third party.
Any daily mark providedbyGDeriv LLC may not necessarily, and would often not be expected to, be a price at which either we or you would agree to replace or terminate a Swap; include adjustments you need to make internally to account for your credit reserves, funding or liquidity costs; unless otherwise expressly agreed, be the basis for margin calls and maintenance of collateral; or be the value of the Swap that is marked on our books and records. To the extent that such marks may be based on inputs or information obtained from external sources, GDeriv LLC believes any such sources to be reliable but makes no representations or warranties with respect to the accuracy, reliability, or completeness of such data or information, or the resulting daily mark. Pursuant to Section 4s(h)23.431(d) of the CEA, the daily mark is exclusive of several additional factors that may influence our pricing of Swaps, namely, profit, credit reserves, hedging costs, funding and liquidity or any other costs or adjustments. Unsettled cash payments due from one party to the other are taken into account in the daily marks. Daily marks are provided only in respect of Swap transactions that have not terminated or been novated or otherwise transferred to a third party, notwithstanding any unsettled cash payments that may remain in respect of such a terminated, novated or otherwise transferred Swap transaction. Daily marks are not provided in relation to your entire portfolio. No daily mark is provided with respect to any Swap transactions with an affiliate that is not a Swap Dealer or in respect of any derivatives transaction that is not regulated by the CFTC. Any daily marks provided by GDeriv LLC, as applicable, to you will be calculated as of the close of business on the prior Business Day in the locality specified in the notice of such daily mark to you, such locality to be consistently specified with regard to a class or type of Swaps, as applicable, unless otherwise agreed with Swap Dealer in writing. In addition, each daily mark will be expressed in terms of a position of a specified size and will be applicable only with respect to that size and may not reflect the mark that would be calculated with respect to a position or transaction of any other size. The daily mark is not intended as a valuation or appraisal of the Swap and Swap Dealer does not assert that it is an appropriate basis for valuing the Swap in your financial statements, for tax reporting purposes or otherwise. You should consult with your own auditors and other advisors before relying on or making use of the daily mark for any purpose. Swap Dealer not acting as your advisor, agent or fiduciary in providing the daily mark. The daily mark is provided free of charge and without restrictions on your internal use. The daily mark has been prepared for your use only and you should treat it as proprietary and confidential information. This information may not be shared or reproduced in whole or in part under any circumstances. This information applies to any daily mark delivered to you orally or in written or electronic format.
G. Clearing
With respect to any Swap entered into between you and Swap Dealer that is subject to the mandatory clearing requirements under Section 2(h) of the CEA, you have the sole right to select the DCO at which the Swap will be cleared pursuant to CFTC Regulation 23.432(a). With respect to any Swap entered into between you and Swap Dealer that is not subject to the mandatory clearing requirements under Section 2(h) of the CEA, you may elect to clear such Swap and you have the sole right to select the DCO at which the Swap will be cleared in accordance with CFTC Regulation 23.432(b).
H. Special Entity Status
If you are an employee benefit plan defined in Section 3 of ERISA that is not subject to Title I of ERISA, you may elect to be treated as a special entity pursuant to CFTC Regulation 23.430(c).
I. Recommendations
GDeriv LLC discloses to you in accordance with CFTC Regulations 23.434(b)(3) and 23.440(b)(2)(iii) that it is acting in the capacity as a counterparty to the Swap transaction, is not undertaking to act in your best interests nor is it undertaking to assess the suitability of any Swap or trading strategy involving a Swap for you.
J. Address for Complaints
Set forth below for each Swap Dealer are the physical address, email, and telephone number of the department to which any complaints may be directed:
Galaxy Derivatives LLC
ATTN: Compliance
300 Vesey St. 13th Floor
New York, NY 10282
compliance@galaxy.com
(212) 273-9466
4. OTHER DODD-FRANK ACT DISCLOSURES
A. Segregation of Initial Margin
If you supply funds or other property to Swap Dealer to margin, guarantee, or secure your obligations to Swap Dealer under an uncleared Swap, you have the right in accordance with CFTC Regulation 23.701(a)(1) to require segregation of those funds or other property other than with respect to variation margin payments. This notification is deemed to be effective prior to execution of the first uncleared swap transaction. If you supply funds or other property to Please contact your GDeriv LLC sales or business representative if you would like further information on how to make this election, or write to sdonboarding@galaxy.com
B. Variation Margin Calculation Methodology Overview
In accordance with CFTC Rule §23.155(b)(1), an overview of the methodology to calculate a reasonable approximation of the variation margin requirement used by Swap Dealer is available to you upon request. Please contact your GDeriv LLC sales or business representative if you would like further information.
[1] For purposes of this Disclosure Statement, the term “digital asset” refers to an asset that is issued and/or transferred using distributed ledger or blockchain technology, including, but not limited to, “virtual currencies,” “coins,” and “tokens.”