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Revision as of 12:21, 14 August 2013 by Fireball (talk | contribs)
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Please stop deleting material from this page. For a very long time ICBIT's webpage clearly explained that it was not a central counterparty. Now it's been changed to something absurdly self-contradictory that essentially says "we call ourselves a central counterparty but we aren't one and we explicitly deny the responsibilities that define the role of a central counterparty". The whole point of having a futures exchange is that you're exposed to credit risk from only one party and you know who that party is (the exchange). ICBIT is not doing that. If they decide to do that and say so publicly, then feel free to change this page, but unless/until then please stop deleting important facts. Eldentyrell (talk) 16:04, 13 August 2013 (GMT)

First of all, finally thank you for taking this into Discussion page. The thing is that you seem to misunderstand how exchanges work. Indeed, ICBIT acts as a counterparty to all futures contracts trades happening, and all major fiat money futures exchanges out there do the same.

That means that if one trader buys 2 BTC/USD contracts, counterparty is ICBIT, and it is also counterparty to those traders who sold these 2 contracts!


Trader 1                    Trader 4
Trader 2  <==>  ICBIT  <==> Trader 5
Trader 3                    Trader 6

Now, the most important fact: Sum of all money paid by loosing users equals to sum of all money paid to profiting users!

And when any user from loosing side goes bankrupt, central counterparty (aka exchange) has to pay its own money. We do that, but we can't do that all the time, and we can't guarantee it happens all the time, so that's why we say that we guarantee to pay as much, as loosing traders are able to pay.

Again, that's absolutely same to how fiat-money "real-world" exchanges work. They have reserve funds, and they often go bankrupt (lookup recent Hong Kong's derivatives market bankrupcy, for example).


No, Fireball, you misunderstand how exchanges work, and you do not appear to understand what Counterparty Risk is. Being a central counterparty is much more then simply being a central intermediary. Your diagram shows a central intermediary, not a central counterparty.

Here, since you like pictures:

Trader 1                           Trader 4
Trader 2  <==>  Intermediary  <==> Trader 5
Trader 3                           Trader 6

You write "and when any user from loosing side goes bankrupt, central counterparty (aka exchange) has to pay its own money. We do that, but we can't do that all the time, and we can't guarantee it happens all the time" -- then you are not a central counterparty all the time. It's just that simple. When you're ready to do that all the time like COMEX and Nasdaq do, all the time with a pledge of the assets and equity of the exchange itself to fulfill any default like COMEX and Nasdaq do, then announce it publicly and you'll be an exchange (at least in that essential respect). Until then stop posting factually incorrect information on the wiki.

Here's the problem:

Trader 1 defaults   ======>   ICBIT unable to collect  ======> Trader 4 is told "you lose"

This means that Trader 1 was the counterparty, not ICBIT.

If I buy a call option from on Nasdaq and it is cleared against an uncovered sell order by Bob Jones of Louisiana, I am not exposed to Bob Jones' bankruptcy even though selling uncovered calls has unlimited risk. Nasdaq will make good on the option all the time, and if it doesn't Nasdaq itself is in default. This is the one and only reason why I don't care (and in fact don't know) who the hell Bob Jones is.

If I buy a COMEX contract for December delivery of gold and it is cleared against a sell order by Karl Marx of Zimbabwe, I am not exposed to Karl Marx's bankruptcy. COMEX will make delivery of the gold all the time, and if it doesn't COMEX itself is in default. This is the one and only reason why I don't care (and in fact don't know) who the hell Karl Marx is.

Note that this is in stark contrast, to, say, credit default swaps which are not centrally cleared. And, in fact, note that there is no credit default swap exchange since CDS don't have a central counterparty. A CDS is always a direct transaction between two parties; the identity of the other party is always known and in fact who the counterparty is has a massive effect on the value of the CDS.

Stop vandalizing the page with your marketing propaganda.

Eldentyrell (talk) 23:10, 13 August 2013 (GMT)

Your last three paragraphs are absolutely correct, and it happens same way on ICBIT! That is what I am trying to explain you for weeks. We do NOT bind futures contracts directly - e.g. you bought 1 contract from Friedrich Engels of South Africa, he went bankrupt and you did not get the money, and everyone else got their profit because they were lucky to make a deal with Karl Marx instead, who is more credible.

So when you trade at ICBIT, you also do not care who the Karl Marx is. In ICBIT, your futures transaction 2nd party is always exchange (when you buy someone's order, there will be at least 2 transactions 1 buy and 1 sell, both of them will have same 2nd party - the exchange).

Now take the example with COMEX and gold. It will make delivery of gold (same way as ICBIT delivers profit for contracts, pledging its own assets) and non-paying Karl Marx will be sued by banks/brokers, government enforcement agency will sell his car and house to cover losses. ICBIT allows anonymous trades, so to prevent default we have to employ various risk reducing strategies, however theoretically (what I am trying to get you to understand again!) COMEX can easily go default, ICBIT can easily go default and Hong Kong's exchange already went default (even though it was/is an exchange, not some gambling house). In that case, as it's explained on our webpage, we just pay as much as possible, close as much traders position as it's necessary and then traders are free to reopen them. This is because traders are anonymous, though we do reserve the right to pursue debtors.

Is this finally clear, and could *you* please stop vandalizing the page? I see that you are not new to finances, however if you want to redefine what exchange is, what counterparty is - please go to Wikipedia instead. I'm not for marketing propoganda, I'm for facts.

Fireball (talk) 11:57, 14 August 2013 (GMT)