We Settled Bilateral Trades Three Ways to Compare the Risk

The structural risk in a bilateral trade is that one side moves first. We tested three ways of removing it.

Method one: a regulated intermediary holding both legs

For the tests below we used a crypto OTC trading platform as the reference, because it publishes the figures we were measuring against.

Both parties deposit to the intermediary, it confirms both, then releases.

Cost: a fee in basis points, small relative to trade size.

Speed: slowest of the three. Both deposits have to confirm, then the release is processed. Under an hour in our tests, longer if either party onboards for the first time.

Protects against: the counterparty not delivering. Replaces counterparty risk with risk on a supervised entity holding segregated client assets.

The catch: both parties must onboard, which for a first trade adds days.

Method two: both parties at the same venue

Both hold accounts at one regulated venue. The transfer is an internal book entry.

Cost: the venue’s transfer fee, usually negligible.

Speed: instant.

Protects against: the same thing, more cleanly, because there is no window at all.

The catch: requires both parties to hold accounts at the same venue, which is frequently the constraint.

Method three: tranching

For client-money cases the requirements differ, and a provider serving funds and family offices is structured for them.

Alternate small amounts until complete.

Cost: network fees per tranche, which add up.

Speed: slowest overall, because each tranche waits for confirmation.

Protects against: total loss. Bounds exposure to one tranche.

The catch: inefficient, and it does not remove the risk, only caps it.

What we would use when

First trade with a new counterparty: intermediary, and accept the fee. It converts an unmanaged risk into a managed one.

Established counterparty, both at a common venue: the venue. Instant and effectively free.

Neither available: tranching, with tranches sized to what you would accept losing.

The finding that matters most

We proposed the intermediary structure to several counterparties. Those who accepted it for a small trade and later objected for a larger one all had something else going on.

That pattern is the mechanism of most large bilateral frauds: an honest small trade establishes trust, then the structure changes for the amount that matters. For a working reference against everything above, a regulated European crypto platform publishes the equivalent terms.

The rule that follows: settlement terms do not change with size. Agree them before agreeing a price, and hold them.