OTC V3 Participant Guide: Config and Trade Flow

01What OTC V3 Is

OTC V3 is an isolated bilateral OTC portfolio system.

Each portfolio is a private margin container between exactly two parties:

one portfolio = party A + party B + one collateral asset + one risk config

Inside that portfolio, the two parties can trade a package of option legs, forward legs, and premium transfers. Positions inside the same portfolio net against each other according to the portfolio's agreed risk parameters.

Nothing nets across different portfolios. The same two counterparties can open many separate portfolios with different terms.

02The Key Mental Model

Think of a portfolio as an isolated OTC agreement:

• the two parties agree on a market, for example WBTC/USDT;
• they agree on collateral and premium asset, for example WBTC;
• they agree on margin rules, model rules, limits, and closeout rules;
• they deposit collateral into that isolated portfolio;
• every new trade is an amendment to that same isolated book;
• expiry settlement and closeout happen only inside that portfolio.

03What Is Configured

A portfolio config answers seven questions:

1. Who are the two parties?
2. Which asset is used for collateral and premium?
3. Which strikes are allowed?
4. How is margin calculated?
5. Which volatility/model assumptions are used?
6. What happens if a party becomes unsafe?
7. What are the operational limits?

Most users should not edit all parameters manually. A venue or market maker should usually provide a standard market preset.

04What Can Be Defaulted

For a standard market, most config fields can be preset.

Example: a standard WBTC/USDT profile can define:

• collateral and premium asset: WBTC;
• quote unit for strikes: USDT;
• strike grid: allowed strike range and spacing;
• stress range: how far spot price is shocked for margin;
• minimum floor margin;
• initial and maintenance margin multipliers;
• default volatility bounds;
• default closeout grace period;
• default closeout reward and fee;
• maximum active expiries;
• maximum active positions;
• maximum legs per package trade.

In a normal UI, this should appear as a preset such as:

Market: WBTC/USDT
Risk profile: Standard institutional OTC
Collateral: WBTC

The participant should not need to type every numeric parameter.

05What Users Must Choose

At minimum, a new portfolio needs:

• party A address;
• party B address;
• market preset, for example WBTC/USDT;
• unique portfolio salt or identifier;
• optional activation deadline.

Everything else can come from a standard preset unless the parties want custom terms.

06What Market Makers May Customize

Professional market makers may want custom risk terms. Common custom fields are:

• wider or tighter stress range;
• higher minimum margin floor;
• higher initial margin multiplier;
• custom volatility model;
• different short-volatility add-ons for each side;
• lower long-option credit;
• stricter position limits;
• custom closeout grace period;
• custom closeout policy reference.

These settings should be negotiated before the portfolio is created. Once a portfolio is created, its core config is meant to be stable for that portfolio. If the parties want materially different terms, they should create another portfolio.

07Config Sections In Plain English

Core

Defines the two parties and the collateral asset.

The collateral asset is also the asset used for premiums and internal balances. For example, in a WBTC/USDT market, collateral and premiums are denominated in WBTC, while strikes and oracle prices are expressed in USDT per WBTC.

Strike Grid

Defines which strikes are valid.

For example:

minimum strike: 5,000
maximum strike: 400,000
spacing: 500

This means strikes such as 50,000, 50,500, and 51,000 are valid, but 50,250 is not.

The grid keeps positions standardized and makes margin calculation bounded.

Margin

Defines how conservative the collateral requirement is.

The important concepts are:

• lower stress price: downside spot shock used in risk checks;
• upper stress price: upside spot shock used in risk checks;
• minimum margin floor: minimum required collateral for short optionality;
• initial margin: requirement after opening or increasing risk;
• maintenance margin: lower threshold used for closeout risk.

Initial margin is stricter than maintenance margin. A party may be allowed to continue holding an existing position while below initial margin, but if it falls below maintenance margin it can enter closeout flow.

Model

Defines how option value is estimated before expiry.

The model may use a standard volatility bound, or a custom volatility oracle / model selected by the parties. The goal is to make sure short option risk is charged before expiry, not only at expiry.

Useful knobs:

• minimum volatility;
• maximum volatility;
• short-volatility spread;
• long-option discount;
• maximum model age;
• model reference hash.

In simple terms:

short optionality is charged conservatively;
long optionality can receive limited credit, if allowed by the config.

Closeout

Defines what happens if a party becomes unsafe.

The key concepts are:

• grace period: time after notice during which the party can cure the issue;
• closeout reward: incentive paid to the closer if closeout happens;
• closeout fee: protocol or venue fee, if configured;
• closeout policy hash: reference to off-chain legal or operating terms.

Closeout is not the normal way to trade out of a position. Normal reductions or full flattening are done through new package trades agreed by both parties.

Limits

Defines portfolio size boundaries.

Common limits:

• maximum active expiries;
• maximum active option buckets per expiry;
• maximum active positions;
• maximum option legs in one package trade;
• maximum forward legs in one package trade.

Limits are important because they make gas cost and portfolio complexity bounded.

Extra Config Hash

Optional reference for additional negotiated terms.

This can point to an off-chain document or venue policy without changing the base config format.

08Trade Flow

Step 1: Select Market

The parties select the market profile, for example:

WBTC/USDT

This defines the base asset, quote unit, oracle source, and default preset.

Step 2: Agree Portfolio Terms

The two parties agree:

• who is party A and party B;
• which preset or custom config to use;
• portfolio limits;
• margin policy;
• closeout policy.

The result is a deterministic portfolio identifier.

Step 3: Create Portfolio

The portfolio is created as an isolated container for those two parties and that exact config.

After creation, the portfolio has:

• its own collateral balances;
• its own position book;
• its own nonce sequence;
• its own lifecycle state.

Step 4: Deposit Collateral

Each party deposits the base asset into the portfolio.

Deposits increase that party's available collateral inside this one portfolio only. Depositing into one portfolio does not help another portfolio.

Step 5: Agree Package Trade

A package trade can include:

• multiple option legs;
• multiple forward legs;
• a premium transfer;
• a deadline;
• a nonce.

The package can open, add, reduce, flatten, or reverse exposure.

There is no special "partial close" object. A partial close is simply a package trade whose deltas reduce existing positions.

Step 6: Execute Package Trade

Before execution, the system checks:

• both parties and config match the portfolio;
• the nonce and deadline are valid;
• the legs fit the allowed grid and limits;
• the premium transfer is within the agreed terms;
• both sides remain sufficiently collateralized after the trade.

If checks pass, positions and balances update atomically.

Step 7: Monitor Health

After trades, each party should monitor:

• collateral balance;
• initial margin;
• maintenance margin;
• upcoming expiries;
• pending settlement;
• closeout notice state.

If a party approaches maintenance threshold, it can deposit more collateral or agree to reduce risk through another package trade.

Step 8: Amend Or Reduce

Future trades in the same portfolio net into the existing book.

Examples:

• add a new option spread;
• reduce half of a short call;
• add a forward hedge;
• flatten all exposure;
• transfer unwind premium.

All of these are package trades.

Step 9: Expiry Settlement

When an expiry passes, the market price is fixed once for that market expiry.

Each portfolio can then settle its own expired positions using that fixed price. Settlement updates the parties' balances inside the portfolio.

Expired positions should be settled before new meaningful activity in that portfolio.

Step 10: Closeout

If a party breaches maintenance and does not cure during the grace period, the portfolio can be closed out.

Closeout:

• values the remaining portfolio using the agreed model;
• pays the non-defaulting side as far as collateral allows;
• applies configured reward and fee;
• records any unpaid amount if collateral is insufficient;
• prevents further ordinary trading in that portfolio.

After closeout, the parties can create a new portfolio if they want to trade again.

09Premium Flow

Premium is part of the package trade.

The premium can be fixed or Dutch-style:

start amount -> end amount over time

The executing party accepts the premium implied by the current time, as long as the package is still valid.

Premium is paid in the same base asset as collateral.

10Forward Flow

Forward legs are native package legs.

A forward leg has:

• expiry;
• signed size;
• delivery price.

Forwards are included in the same portfolio margin and settlement flow as options, but their valuation is linear rather than option-like.

11Practical Preset Model

A good production UI should expose three layers:

Basic

The participant chooses:

• market;
• counterparty;
• portfolio name or salt;
• collateral amount;
• package trade details.

Advanced

Professional users may adjust:

• margin profile;
• volatility model;
• closeout grace period;
• position limits.

Expert

Only integrators or risk teams should touch:

• model reference hashes;
• policy hashes;
• custom oracle/model address;
• gas and age limits for external model data.

12What Should Not Be Hidden

Even in a clean UI, the participant should clearly see:

• collateral asset;
• quote unit;
• margin profile;
• model profile;
• closeout grace period;
• reward and fee;
• active position limits;
• final config hash;
• final portfolio identifier.

These are economically meaningful terms.

13Common Questions

Can the same two parties have multiple portfolios?

Yes. This is expected. They may want different portfolios for different strategies, maturities, risk policies, or legal terms.

Does collateral net across portfolios?

No. Collateral is isolated per portfolio.

Does a new trade need a new portfolio?

No. If it uses the same two parties and the same config, it can be added to the existing portfolio as another package trade.

How do I partially close a position?

By executing another package trade with opposite deltas.

What happens if a party cannot fully pay settlement or closeout?

The available collateral is applied according to the portfolio rules. Any unpaid amount is tracked inside that portfolio.

Are premiums in quote currency?

No. Premiums are paid in the portfolio base asset, the same asset used for collateral.

14Short Checklist Before Trading

Before creating or trading a portfolio, confirm:

• correct market profile;
• correct collateral asset;
• correct party addresses;
• acceptable margin profile;
• acceptable volatility/model profile;
• acceptable closeout grace period and fees;
• position limits are sufficient for the strategy;
• portfolio identifier matches the expected config;
• both parties have deposited enough collateral.