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
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