ISDA Opines on Standardization and Digitization in Derivatives Markets
ISDA explained its opinion on the standardization and digitization of financial/derivatives contracts and the associated documentation. A recent survey shows that members of ISDA from different business functions supported the ISDA objective of developing standards and digital formats for documentation and other products to support automation. ISDA is planning to make its forthcoming 2020 ISDA Interest Rate Derivatives Definitions available in a digital format—in line with the priority expressed by members in the survey. ISDA is also looking to align and integrate the digital documentation and legal data with other standards. ISDA, along with several other Associations, has written a letter to FSB, IOSCO, and BCBS to assert their joint commitment to defining and promoting the development of a digital future for financial markets, focused on three core areas: standardization, digitization, and distribution.
The Associations include Association of German Banks, the Australian Financial Markets Association (AFMA), International Capital Market Association (ICMA), the International Islamic Financial Market, the International Securities Lending Association (ISLA), LBMA, and UK Finance. The letter highlights that the adoption of common data and process standards across the industry will allow for the consistent aggregation of global financial data and more comprehensive risk assessment of supervised firms, promoting greater confidence in the integrity of financial markets. ISDA is looking to align and integrate the digital documentation and legal data with other standards—for example, the Common Domain Model, which establishes a common digital representation of events and processes that occur during the lifecycle of a trade. Respondents to the survey noted that doing so will allow information within the documentation to flow directly through to trading, operational, and risk management systems in a consistent way, enabling front-to-back automation.
Increased digitization will improve risk management through greater alignment among contracts, processes, and data and will allow for the introduction of real-time regulatory oversight. None of this is possible without the industry-led development of enhanced standards and distribution of these standards in digital formats that allow direct deployment within these technologies. In the letter, the Associations highlight that they will support the members in developing these standards through a series of principles and objectives across standardization, digitization, and distribution, including the following:
- Support the development of common, interoperable industry standard models for financial transactions and processes
- Work with members and relevant authorities to promote alignment among disparate data standards and greater consistency of regulatory requirements across the market
- Promote the adoption of standardized and simplified legal documentation where appropriate in the relevant market
- Explore and pursue the delivery of industry-standard documentation in digital formats
- Support the development of robust legal agreement data models aimed at connecting contractual terms with supporting processes and data
- Work with members and relevant authorities to establish greater legal and regulatory certainty on the use of electronic contracts and signatures
- Distribute new standards on an industry-wide, commercially reasonable basis where possible to support the development and implementation of interoperable and efficient technology solutions
- Establish a robust and inclusive governance framework around the development, operation, and maintenance of any mutualized technology standards
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Keywords: International, Banking, Securities, Common Domain Model, Derivatives, Derivatives, Regtech, Automation, FSB, IOSCO, BCBS, ISDA
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