A new Federal Reserve working paper released February 12, 2026 is challenging the way cryptocurrency risk gets calculated in derivatives markets—and the implications for institutional trading could be significant. The researchers argue that current frameworks are dangerously miscalibrated for crypto’s unique behavior, and they’re proposing a fix that would force institutions to post substantially more collateral on crypto-linked trades.
The timing isn’t coincidental. With Bitcoin down 48%, $775 million in weekly liquidations hitting the market, and BlockFills halting withdrawals amid prime brokerage stress, the fragility of existing risk models is on full display.
The Core Problem
Right now, the industry’s standard risk model—the ISDA Standardized Initial Margin Model, known as SIMM—lumps cryptocurrencies together with traditional commodities like oil and gold. SIMM is the backbone of derivatives risk management, governing $431 billion in initial margin across roughly 90% of uncleared trades globally.
The Fed researchers say this classification is fundamentally wrong. Crypto doesn’t behave like oil or gold. It exhibits sharper price swings, volatility that spikes faster during crises, and far thinner liquidity when markets are under stress. Forcing it into the commodity bucket means the risk weights used to calculate required collateral are dramatically too low.
When the researchers tested calibrating crypto risk weights separately—using the Bloomberg Galaxy Crypto Index as a proxy and running stress period analysis—the numbers roughly doubled. Bitcoin and Ethereum required delta risk weights of 25-35%, compared to the 12-18% applied under the commodity classification. That’s not a minor adjustment. It represents a fundamental repricing of crypto risk.
How the Proposal Works
The paper proposes splitting cryptocurrencies into two distinct buckets.
The first covers pegged assets—stablecoins like USDT and USDC. These get lower risk weights reflecting their design intent to maintain stable value. The analysis found that correlations within this bucket were being underestimated by about 6%, but the overall risk profile remains dramatically lower than floating cryptocurrencies. Cross-class correlations between stablecoins and traditional assets came in near zero (around 0.02), which actually validates treating them separately.
The second bucket covers floating or unpegged cryptocurrencies—Bitcoin, Ethereum, XRP, and similar assets. These absorb the full volatility premium. The methodology recommended mirrors SIMM’s existing commodity approach but uses three years of recent data plus one year of stress period calibration, selected through what the researchers call a “greedy” algorithm that maximizes coverage of severe market conditions across six representative instruments.
What This Means in Practice
The practical implications are substantial for anyone operating in crypto derivatives markets.
Institutions with Bitcoin-linked interest rate swaps or similar instruments could face collateral increases of 50-100%. With $1.2 trillion in crypto derivatives notional outstanding, that’s a massive amount of additional capital that would need to be posted. Clearing members would need to recalibrate their systems. Prime brokers like Coinbase Prime and Hidden Road (now Ripple Prime) would need to adjust the margin haircuts they apply to client positions. Hedge funds optimizing portfolios across crypto and traditional assets would need to rethink their strategies entirely.
One significant consequence: cross-margin benefits would disappear. Right now, crypto positions can theoretically offset commodity hedges because they share a risk class. Under the proposed framework, that netting benefit evaporates. Crypto no longer offsets anything in traditional asset classes, pressuring capital efficiency across the board.
For derivatives desks specifically, Bitcoin interest rate swaps and swaption desks are looking at roughly 40% collateral hikes. Ethereum options volatility surfaces would essentially double. Stablecoin basis trades would be relatively insulated, which is one of the few silver linings in the proposal.
Why This Matters Beyond the Numbers
The Fed proposal reflects something more significant than just a technical adjustment to margin calculations. It represents formal recognition that cryptocurrency is a legitimate, distinct asset class—not a commodity pretending to be something else.
There’s an important distinction here. Reclassification imposes discipline, but it also validates. Pension funds and sovereign wealth funds operating under strict compliance requirements often can’t touch assets that lack proper regulatory classification. A formal crypto risk class, even one requiring higher collateral, actually opens the door for these massive pools of capital to participate in ways they currently can’t.
The context matters too. SIMM’s commodity misclassification contributed to the under-margined exposures that made the FTX and LUNA collapses so catastrophic. ISDA reports estimated initial margin shortfalls reached $8 billion during those 2022 cascades. Getting the margin framework right now, during the current downturn, is exactly the kind of structural improvement that makes future crises less severe.
The proposal also positions the U.S. framework ahead of the EU’s EMIR 3.0 crypto margin rules, which aren’t scheduled until March 2027. In the regulatory race to establish credible crypto frameworks, being first matters.
The Complications
Implementation won’t be straightforward. ISDA’s SIMM governance process requires industry consensus, which means the methodology debates will be fierce. The choice between using the BGCI proxy versus instrument-specific greedy algorithms for stress period selection will spark significant disagreement among market participants with conflicting interests.
The pegged/unpegged split also requires ongoing maintenance. Algorithmic stablecoins blur the line between the two buckets—what happened with TerraUSD in 2022 is a perfect example of a “pegged” asset behaving exactly like an unpegged one during stress. Maintaining accurate classification as new instruments emerge will be a continuous challenge.
Global harmonization is critical but uncertain. Japan and the UK maintain their own SIMM variants that diverge from the U.S. framework. CFTC oversight gaps persist in certain areas. A fragmented global approach to crypto margin requirements could create regulatory arbitrage opportunities that undermine the whole exercise.
There’s also the political tension. Trump’s deregulation agenda clashes directly with the margin rigor this proposal demands. How that tension resolves will shape implementation timelines and final calibrations significantly.
The Bigger Picture
JPMorgan is projecting institutional inflows into crypto for the second half of 2026 once post-calibration clarity emerges. BlackRock’s tokenization pilots are waiting on cleared derivatives infrastructure. The irony is that stricter margin requirements, while painful in the short term, may be exactly what attracts the most conservative institutional capital over the medium term.
Higher collateral requirements deter retail speculation while simultaneously building the compliance infrastructure that pension funds and sovereign wealth demand. It’s a trade-off that the industry probably needs to make to achieve genuine institutional maturation.
The Fed paper essentially argues that crypto’s coldest winter is the perfect laboratory for getting this right. Market stress reveals model failures. The $775 million weekly liquidations and the BlockFills collapse aren’t just painful events—they’re data points proving that the current framework is inadequate.
Getting margin discipline right doesn’t prevent all future crises. But it makes the financial system meaningfully more resilient to them. That’s the unglamorous, technical work that turns a speculative asset class into durable financial infrastructure—and that’s exactly what this proposal is trying to accomplish.
