ISDA is proposing ways to achieve greater collaboration between derivatives and securities financing transaction, or SFT, markets. The proposal has been set out in a recently published whitepaper, which highlights the significant efficiencies that could be achieved by closer coordination and alignment between the two markets, resulting in reduced costs for market participants. The proposal sets out that institutions operating in both derivatives and securities financing transaction markets could benefit from greater harmonization in documentation as well as from improvements in post-trade processing and automation.
ISDA has highlighted several areas where greater standardization and collaboration could be achieved, including:
- Developing common legal definitions across the derivatives and securities financing transaction markets, documenting derivatives and securities financing transactions under a common master agreement and procuring one set of legal opinions in jurisdictions around the world on close-out netting for both derivatives and securities financing transactions
- Implementing consistent solutions across the derivatives and securities financing transaction markets that enable market participants to more seamlessly adapt and migrate when key changes (such as the interbank offered rate transition) occur
- Developing common standards and taxonomies to facilitate automation and interoperability across derivatives and securities financing transaction markets and to enable a consistent trade record for confirmation and reporting on a broad scale
The paper highlights that ISDA has developed a Common Domain Model (CDM), which serves as a blueprint for how derivatives are traded and managed across the trade lifecycle. The CDM has the potential to cover other financial markets, including securities financing transactions. By providing a single data representation of trades across the derivatives and securities financing transaction markets, CDM could provide significant cost savings and address the market need for an efficient solution to this issue. With a single documentation platform and CDM for the repo, securities lending, and derivatives markets, there will be a single entry point for other service providers. This allows pre-trade service providers and post-trade providers (such as analytics, optimization, and compression platforms as well as regulatory reporting services) to integrate their systems with just one standard, increasing the scalability of the solutions they can provide.
The paper also sets out a proposal for how the ISDA Master Agreement could be expanded to cover securities financing transactions as well as derivatives. The paper proposes a set of securities financing transaction provisions to be added to the schedule of the ISDA Master Agreement, along with publication of a securities financing transaction definitional booklet. The paper also considers certain key issues that would need to be addressed in such an exercise and includes a granular analysis of key terms from the different documents to identify specific potential synergies as well as those key product terms where specificity would need to be maintained.
The EU Capital Requirements Directive and Regulation contain various provisions related to financial instruments, including derivatives. Securities financing transactions are not financial instruments as such, although where they relate to securities, those securities would be financial instruments. There are also provisions related to repurchase transactions, securities, or commodity lending or borrowing transactions and other capital-market-driven transactions other than derivatives. The change of documentation would not affect the characterization and treatment of securities financing transactions for the purposes of this legislation. Similarly, the change of documentation would not affect the characterization and treatment of securities financing transactions under the various US capital regimes (which differ based on the type of US regulated entity involved).
Keywords: International, Banking, Securities, Derivatives, Securities Financing Transactions, Common Domain Model, Interest Rate Benchmark, IBOR Transition, Reporting ISDA
Previous ArticleBDE to Maintain CCyB Rate at 0% in Fourth Quarter of 2020
FDIC is seeking comments on a rule to amend the interagency guidelines for real estate lending policies—also known as the Real Estate Lending Standards.
ISDA is consulting on the implementation of fallbacks for the sterling LIBOR ICE Swap Rate and for the USD LIBOR ICE Swap Rate.
BIS and BoE launched the BIS Innovation Hub Center in London, which is the fourth new Innovation Hub Centre to be opened in the past two years.
ESRB published recommendations on the reciprocation of macro-prudential measures in Belgium, France, Luxembourg, Norway, and Sweden.
SEC announced that the Office of Information and Regulatory Affairs released the Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions.
EC published the Delegated Regulation 2021/931, which supplements the Capital Requirements Regulation (CRR or Regulation 575/2013) with regard to the regulatory technical standards specifying the method for identifying derivative transactions with one or more than one material risk driver.
BCBS is consulting on preliminary proposals for the prudential treatment of cryptoasset exposures of banks.
EBA issued a revised list of validation rules under the implementing technical standards on supervisory reporting.
BIS Innovation Hub, BDF, and SNB announced that, together with a private-sector consortium led by Accenture, they will conduct an experiment using wholesale central bank digital currency (wCBDC) for cross-border settlement.
ESAs published two amended implementing technical standards on the mapping of credit assessments of External Credit Assessment Institutions (ECAIs).