General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
January 30, 2019

ISDA published the first in a series of "legal" guidelines for smart derivatives contracts. The guidelines outline some potential smart derivatives contract models, set out principles for the development of smart derivatives contracts, and identify contractual and documentation issues that may be relevant in the development and implementation of new technology platforms, products, and solutions for use within the derivatives industry.

The guidelines are not intended to specify or recommend any particular approach, or address any particular technological application or project. Rather, they are intended to provide high-level guidance on the legal documentation and framework that governs derivatives trading and to point out certain issues that may need to be considered by technology developers when introducing technology into that framework. The guidelines establish that smart derivatives contracts do not necessarily need distributed ledger technology (DLT) to function and the adoption of smart derivatives contracts could be facilitated through other technology solutions. However, DLT is well-suited to the implementation of smart contract technology. These guidelines, therefore, assume that many smart derivatives contract models and applications may make use of DLT in some form.The paper establishes the following four principles in the development of smart derivatives contracts:

  • Smart derivatives contracts should be compatible with existing standards.
  • Only those parts of a derivatives contract that are capable of being automated should be considered.
  • Effective automation should be based on legal validation.
  • Only those parts of a derivatives contract where there exists sufficient benefit in automating should be considered for automation.

The guidelines also outline the considerations for technology developers. The application of technology solutions to ISDA documentation raises some interesting questions about the precise boundaries of the single agreement architecture. One of the most fundamental questions is whether computer code might ultimately form part of the single agreement. The single agreement approach ensures that each party has a single legal relationship and financial exposure to its counterparty. Where the technology application is designed to record transaction data, it will be important to consider whether this data or any data outputs (for example, settlement records) should be considered part of the single agreement. A potential consequence of data sitting outside the single agreement construct is that it may not be admissible for construction of the overall legal and contractual relationship in the event of a dispute or close out. ISDA guidelines specify that, in designing technology enabled solutions for the trading or processing of derivatives, technology developers should work with their legal advisers to understand the various points of connection between each of the documents, take account of legal relationships created with any third parties, and consider how the solution may impact upon the entirety of the contractual relationship.

 

Related Links

Keywords: International, Banking, Securities, Regtech, Derivatives Contracts, Smart Contracts, Distributed Ledger Technology, Guideline, ISDA

Related Articles
News

EU Finalizes Regulation on Prudential Backstop for Bank NPEs Under CRR

Regulation (EU) 2019/630, which amends the Capital Requirements Regulation, or CRR (Regulation 575/2013), with regard to the minimum loss coverage for non-performing exposures (NPEs), has been published in the Official Journal of the European Union.

April 25, 2019 WebPage Regulatory News
News

FASB Issues Minor Improvements to Financial Instruments Standards

FASB issued an Accounting Standards Update (ASU No. 2019-04) that clarifies and improves areas of guidance related to the recently issued standards on credit losses (Topic 326), derivatives and hedging (Topic 815), and recognition and measurement of financial instruments (Topic 825).

April 25, 2019 WebPage Regulatory News
News

APRA Grants License to New Authorized Deposit-Taking Institution

APRA announced that it has granted Judo Bank Pty Ltd a license to operate as an authorized deposit-taking institution without restrictions, under the Banking Act 1959.

April 24, 2019 WebPage Regulatory News
News

BoE Report on Evaluation of Approach to Concurrent Stress Testing

BoE published a report on the evaluation, by the Independent Evaluation Office (IEO), of the effectiveness of the approach of BoE to concurrent stress testing.

April 24, 2019 WebPage Regulatory News
News

FDIC Consults on Approach to Resolution Planning for IDIs

FDIC approved an Advance Notice of Proposed Rulemaking (ANPR) and is seeking comment on ways to tailor and improve its rule requiring certain insured depository institutions (IDIs) to submit resolution plans.

April 22, 2019 WebPage Regulatory News
News

FDIC Specifies Submission Timeline for FFIEC 031, 041, and 051 Reports

FDIC published the financial institution letters (FIL-21-2019 and FIL-22-2019) that offer guidance on submission of Call Reports FFIEC 051, FFIEC 041, and FFIEC 031 for the first quarter of 2019.

April 19, 2019 WebPage Regulatory News
News

US Agencies Propose to Revise Call Reports FFIEC 031, 041, and 051

US Agencies (FDIC, FED, and OCC) proposed to revise and extend, for three years, the Call Reports FFIEC 031, FFIEC 041, and FFIEC 051.

April 19, 2019 WebPage Regulatory News
News

US Agencies Propose to Amend Rule on Supplementary Leverage Ratio

US Agencies (FDIC, FED, and OCC) are proposing to revise the capital requirements for supplementary leverage ratio, as required by the Economic Growth, Regulatory Relief, and Consumer Protection (EGRRCP) Act.

April 18, 2019 WebPage Regulatory News
News

EIOPA Held InsurTech Roundtable on Use of Cloud Computing by Insurers

EIOPA had, on April 11, 2019, hosted its Fourth InsurTech Roundtable on the use of cloud computing by insurance undertakings.

April 17, 2019 WebPage Regulatory News
News

EP Resolution on Proposal for Sovereign Bond Backed Securities

The European Parliament (EP) published adopted text on the proposal for a regulation of the European Parliament and of the Council on sovereign bond-backed securities (SBBS).

April 16, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2963