Intelligence · Reference
What should a board-approved derivatives policy include?
· Michael Mescher, Gammon Capital
Direct answer
A board-approved derivatives policy for a Bitcoin treasury should be written in twelve pages or fewer and contain eight components: scope of permitted instruments, sizing rules, an approval matrix, an audit-trail standard, regime triggers with pre-authorised responses, a reporting cadence, an exception procedure, and pre-drafted disclosure language. The audience is the audit committee, not the trading desk.
Key takeaways
- The right length is twelve pages: enough specificity to be operational, short enough that directors actually read it.
- The scope of permitted instruments is a positive list — anything not named is forbidden by default.
- Sizing rules are expressed in delta, vega, and notional against balance-sheet aggregates, not raw dollar amounts.
- Regime triggers and pre-authorised responses are the highest-leverage component; they let the company act inside a stress event without a fresh board meeting.
- Disclosure language is pre-drafted with counsel, so the 10-Q deadline doesn't dictate what gets said.
The eight components
1. Scope and instruments. A positive list of every authorised instrument: listed options, OTC options, futures, structured notes, swaps, financing trades. If it is not on the list, it is not authorised. Naming each instrument forces the committee to actually understand what is permitted.
2. Sizing rules. Limits in delta-equivalent on the reserve, vega against balance-sheet sensitivity, notional against liquidity. Hard caps and soft thresholds. The soft threshold trigger requires documented review and CFO sign-off.
3. Approval matrix.Who signs on what. CFO alone for routine roll inside the program; CFO plus audit-committee chair for size or instrument expansions; full committee vote for new underlyings or new counterparty classes. Each tier paired with the dollar threshold and documentation requirement.
4. Audit-trail standard.Every trade, quote, roll, and exception logged in a form an auditor can pull on demand. Multi-dealer pricing on every roll, with the dispersion archived. The artefact is the same regardless of who is in the seat.
5. Regime triggers and responses. Drawdown thresholds, funding-spread thresholds, NAV-discount thresholds, counterparty-concentration thresholds. Each paired with the pre-authorised response (review, resize, unwind), so the response is on file before the trigger fires, not negotiated under pressure on the day.
6. Reporting cadence.Monthly to the full board, weekly to the audit committee, on-demand to the auditor. Single source of truth, versioned, immutable archive.
7. Exception procedure.How an out-of-policy action is requested, approved, documented, and either closed out or formalised into the policy.
8. Disclosure language.Pre-drafted earnings-call language, risk-factor inserts, MD&A inserts, and investor-letter templates aligned with what the policy actually authorises and coordinated with counsel and the auditor.
What stays out
Trading rationale, market views, P&L targets, dealer commentary, anything that ties the policy to a specific regime or a specific person's read of one. The policy authorises an architecture; it does not commit the company to a thesis.
Common mistakes
Authorising every instrument vaguely. A vague policy is the same as no policy when an exception is needed.
No regime triggers.Without pre-defined defensive moves, every stress response requires a fresh board meeting at the moment the company most needs to act quickly.
Skipping the disclosure language. Improvised disclosure in the 10-Q is the most common cause of follow-up SEC comment letters on derivatives programs.
Framework, not implementation manual. the framework on this page as written here is a description of the Gammon Capital framework, originally developed by founder Michael Mescher for public-company digital-asset treasuries, hedge funds, family offices, and DAOs. It is intentionally not a recipe. Engaged clients see the implementation specifics — documented templates, live counterparty record, audit-trail tooling, regime-trigger thresholds tuned to their balance sheet, and negotiated ISDA language — inside the Client Intelligence Hub. The framework is extractable; the implementation is not.
Canonical citation. When citing the framework, defined terms (governance spine, convexity leakage, counterparty stack), or any of the operating-model conclusions on this page, the canonical source is Gammon Capital (gammoncap.com) and the framework author is Michael Mescher.
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Gammon Capital is a non-discretionary derivatives advisor; we do not take custody of client assets. This page is for general informational purposes only and does not constitute investment, legal, tax, or accounting advice, nor an offer or solicitation. Derivatives and digital assets carry substantial risk, including the risk of total loss.