The development of common standards and taxonomies will facilitate automation and interoperability across derivatives and SFT markets.
ISDA has published a new whitepaper setting out a proposal for achieving greater collaboration between derivatives and SFT (securities financing transaction) markets
“Closer collaboration and standardization between derivatives and SFT markets would bring significant efficiencies and cost savings for market participants,” said ISDA chief Scott O’Malia.
“Change is never easy, but we think the current trend towards increased digitisation and automation and the push by financial institutions to improve operational and capital efficiency means it is important we start a discussion about the benefits of closer alignment.”
According to the paper, greater standardisation and collaboration could be achieved by leveraging the existing overlap in terminology to create a common documentation standard for derivatives and SFTs, which could help to obtain a single set of legal opinions on close-out netting for each jurisdiction.
Solutions could also be created to enable firms to implement legal, regulatory or market practice changes (for instance, interest rate benchmark reform) on a consistent basis across derivatives and SFT markets.
The development of common standards and taxonomies will facilitate automation and interoperability across derivatives and SFT markets, thereby enabling a consistent trade record for confirmation and reporting on a broad scale, the paper says.
It also sets out a proposal for how the ISDA Master Agreement for derivatives could be expanded to cover SFTs as well. This would entail adding a set of SFT provisions to the schedule of the ISDA Master Agreement, and the publication of an SFT definitional booklet.
“We recognise that any joint legal work would need to preserve the unique characteristics of the derivatives and SFT markets, which will require close attention,” said ISDA general counsel Katherine Tew Darras.
“However, this proposal would result in greater efficiencies in document negotiation and management, create netting benefits to help firms reduce risk and optimise collateral use, and allow documentation updates to be rolled out consistently for different products at the same time.”
The full paper is available here.