The ISDA Quarterly or IQ, which examines the issues driving the adoption of technology and explores initiatives to establish standards that will help facilitate full-scale automation across industry, has been published. This year has several urgent to-do items and unmissable deadlines, with the next 12 months being crucial for benchmark reform, Brexit, and the roll out of initial margin requirements. Another key area with ongoing developments is the implementation of the final Basel III reforms as standards on market risk, counterparty credit risk, and credit valuation adjustment are expected to be transposed and implemented in many Basel jurisdictions.
ISDA is also working to ensure legal standards keep pace with the 21st century. This includes the development of a taxonomy and clause library related to the ISDA Master Agreement, along with a project that will increase standardization and make it easier to capture key legal data and share that information consistently across the institution. In ISDA Create, ISDA and Linklaters have developed a tool that will allow that documentation to be negotiated and executed online. The platform is up and running for initial margin while other documents will be added over time. ISDA Create is a new platform that allows firms to produce, deliver, and negotiate derivatives documentation completely online. The system captures, processes, and stores data from these documents, providing users with a complete digital record.
This year, ISDA will publish amendments to the 2006 ISDA Definitions that will incorporate fallbacks into new derivatives referencing certain interbank offered rates (IBORs). A protocol will also be launched to enable firms to embed the new fallbacks into legacy trades as well. Both will take effect approximately three months after publication, significantly reducing the systemic risk posed by continued exposure to LIBOR and other key IBORs. From a derivatives perspective, reaching long-term equivalence and recognition of central counterparties and trading venues during this period will be vital to avoid potential market disruption after the transition. This is also a crucial time for the rollout of the initial margin requirements, with thousands of new counterparty relationships coming into scope of the rules from September. Last year saw an extension of the phase-in schedule for the smallest firms until 2021, which will help reduce a potential compliance bottleneck—but the September 2020 phase-in is still expected to pose a huge challenge for the industry.
IQ presents a bird's eye view of the outstanding issues related to the implementation of Basel III standards. It is believed that the next phase of Basel III looks set to be more challenging, as regulators, legislators, and market participants grapple with more technical, granular changes to the capital framework. In some cases, such as credit valuation adjustment, or CVA, capital requirements, the Basel Committee has recognized the need to consult on targeted revisions. In other cases, concerns will need to be addressed at the national level when the standards are transposed into law.
Keywords: International, Banking, Insurance, Securities, ISDA Quarterly, Benchmark Reforms, Brexit, ISDA Create, Common Domain Model, OTC Derivatives, Fintech, Basel III, FRTB, CVA, SA-CCR, ISDA
Previous ArticleAPRA Publishes Policy and Supervisory Priorities for 2020
APRA updated the lists of the Direct to APRA (D2A) validation and derivation rules for authorized deposit-taking institutions, insurers, and superannuation entities.
EC adopted a package that includes the digital finance and retail payments strategies and the legislative proposals for regulatory frameworks on crypto-assets and digital operational resilience.
ECB published an opinion (CON/2020/22) on proposals for regulations amending the securitization framework of EU, in response to the COVID-19 pandemic.
FCA is consulting on its approach to the authorization and supervision of international firms operating in UK.
MAS published amendments to Notice 637 on the risk-based capital adequacy requirements for reporting banks incorporated in Singapore.
FCA announced that it will move firms to RegData from Gabriel in the coming months in stages, based on the reporting requirements of firms.
ISDA issued a letter to regulators to flag that it now expects the supplement to the 2006 ISDA Definitions and the Interbank Offered Rate (IBOR) Fallbacks Protocol to be effective around mid- to late-January 2021.
APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.
ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.
BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.